
Pass H S ,iJI, 






AMERICAN CITIZEN SERIES. 

EDITED BY 

ALBERT BUSHNELL HART, LL.D. 



PRINCIPLES OF ECONOMICS. 

EDWIN R. A. SELIGMAN, LL.D. 



By the Same Author 



Railway Tariffs and the Interstate 

Commerce Law. 1887. 
Progressive Taxation in Theory and 
Practice, 2d ed. 1908. 
French Translation, 1908. 
The Shifting and Incidence of Tax- 
ation, 3d ed. 1909. 

Italian Translation, 1906; French 
Translation, 1909; Japanese Trans- 
lation, 1 910. 
The Economic Interpretation of 
History, 2d ed. 1907. 
Japanese Translation, 1905; Russian 
Translation, 1906; Spanish Transla- 
tion, 1907. 
Essays in Taxation, 6th ed. 1910. 

Russian Translation, 1909; French 
Translation, 1910; Mahratti Trans- 
lation, 1 910. 



^iwtrificir Citiicir ^tvic^. 



Principles of Economics 



IV/T// SPECIAL REFERENCE 
TO AMERICAN CONDITIONS 



BY 

EDWIN R. A. SELIGMAN, LL.D. 

jHcFickar iSrofrssor of political (ffconomg, 
(lolumliia iElnibcrstta. 

AUTHOR OF "essays IN TAXATION," "THE ECOxNOMIC INTERPRETATION 
OF HISTORY," ETC., ETC. 



FOURTH EDITION, REVISED AND ENLARGED 



LONGMANS, GREEN, AND CO. 

91 AND 93 FIFTH AVENUE, NEW YORK 

LONDON, BOMBAY, AND CALCUTTA 

1909 



Copyright, 1905, . j 
By Longmans, Green, and Co. 

Copyright, 1909, 
By Longmans, Green, and Co. 

First Edition, October, 1905 

Second Edition, revised, September, 1906 

Third Edition, revised and enlarged, 

September, 1907 
New Impression, revised, August, igo8 
Fourth Edition, revised and enlarged, 1909 

Russian Translation, 1907 
Japanese Translation, 1907 



2 4 8*5 2 y 



THE UNIVERSITY PRESS, CAMBRIDGE, D. S. A. 



v^ 



PREFACE 

TO THE FOURTH EDITION. 

IN the explanatory note which accompanied the first 
edition of this work, it was stated that "The object 
of the author is not only to give the salient facts of 
economic life, and to analyze them in the light of modern 
research, but also to present a point of view from which 
to approach the great questions of modern economic 
policy. In the second place the author believes that the 
function of economics is not only to explain what actually 
exists, but to show how it has come to exist, and to fore- 
cast both the probable and the ideal future. Throughout 
the entire work the author endeavors to reconcile the his- 
torical and the a priori methods, and to provide an analysis 
of existing industrial society in the hght of a treatment 
which, while seeking to emphasize the importance of 
wealth, lays especial emphasis on the human side of the 
subject and the subordination of wealth to man." The 
justification of this attempt is evident from the unexpected 
demand for the work, which has led to a constant succes- 
sion of new editions. 

Of the suggestions and criticisms that have been made 
in the various reviews of the book, only one seems to call 
for mention. Some surprise has been expressed that so 
little attention has been devoted to the problems of taxa- 
tion — a field which the author has elsewhere somewhat 
assiduously cultivated. This intentional omission is due 



iv Preface to the Fourth Edition. 

to the conviction that it is inexpedient to attempt a treat- 
ment of public finance in a short treatise on the principles 
of economics. The science of finance is indeed in one 
sense a part of economics, but in another and better sense 
a quasi-independent science. The attempt to treat the 
problems of finance in a few chapters at the end of a 
treatise, on economics, as do most of the English works, is 
bound to be unsatisfactory in the extreme. There is no 
more reason so to include Finance than there would be to 
include Statistics or any other semi-independent discipline. 
A treatment of finance that is in any sense adequate would 
require a volume. It is my hope in the not far distant 
future to issue such a companion volume. 

Several changes have been made in this work since its 
original pubHcation. In the third edition the chapters on 
Money and Banking were entirely re-written and enlarged, 
about double the amount of space being given to the sub- 
ject, which was now treated in four chapters instead of 
two. In the present (fourth) edition the introductory mat- 
ter has been re-written and the chapter references have 
been made to include the important newer literature. In 
the body of the book the charts and tables have been con- 
tinued, so as to incorporate the latest available figures, 
and the facts in general have been brought down to date. 
It is my hope that in this revised form the work may 
continue to enjoy the favor which has hitherto been so 
generously accorded to it. 

Edwin R. A. Seligman. 

Camp Askenonta, 

■ Lake Placid, N. Y., July, 1909. 



Contents 



SUGGESTIONS FOR STUDENTS AND GENERAL 
REFERENCES 

Page 
I. General Treatises in English xvii 

II. General Treatises in Foreign Languages .... xx 

III. Periodicals xxi 

IV. Dictionaries and Cyclopedias xxvi 

V. Government Documents 

A. Local and State Publications xxvii 

B. National Departmental Publications xxx 

C. Congressional Documents xxxix 

D. Indexes xlii 

E. British Official Publications xlii 

VI. Semi-Offictal Publications xliv 

VII. Bibliographies and Finding Lists xlvi 

VIII. List of Select Books xlviii 



Part I. 

INTRODUCTION. 

Chapter 

I. Fundamental Concepts. 

1. References 3 

2. Economic Life 3 

3. Economics or Political Economy ? 6 

4. The Meaning of Wealth 8 

5. Wealth and Man 13 

6. The Measure of Wealth — Income and Capital ... 15 

7. Wealth, Money, and Property 19 

8. Public and Private Wealth 20 

V 



vi Contents Parts I., 11. 

Chapter Page 
II.' Economic Law and Method. 

9 References . 23 

10. Meaning of Economic Law 23 

11. Methods of Economic Investigation 27 

12. Relation of Economics to Other Sciences 28 

13. Relation of Economics to Politics and Other Moral 

Sciences 30 

14. Scope of Economics . 34 



Part 11. 

ELEMENTS OF ECONOMIC LIFE. 

BOOK I. — FOUNDATIONS OF ECONOMIC LIFE. 

III. The Natural Environment. 

15. References 36 

16. Climatic and Geological Conditions ....... 36 

17. The Flora, the Fauna, and the Geographical Location . 40 

18. Changes in Environment 42 

19. Changes in Location 45 

IV. The Population. 

20. References 48 

21. Density of Population 48 

22. Concentration of Population 51 

23. Distribution of Population 53 

24. Increase of Population 55 

25. Migration of Population 59 

26. The Law of Population 60 

BOOK IL — DEVELOPMENT OF ECONOMIC LIFE AND 

THOUGHT. 
V. The Economic Stages. 

27. References 66 

28. Economic Development 66 

29. Primitive Technique 68 

30. Transition from the Lower Stages of Civilization . . 71 

31. Self-sufficing or Isolated Economy 74 

32. Trade or Commercial Economy 76 

33. Capitalist or Industrial Economy 80 



Part II. Contents 



Vll 



Chapter Page 

VI. The Historical Forms of Business Enterprise. 

34. References 84 

35. Primitive Economic Activity — The Clan 84 

36. The Family 86 

37. Help or Hire System Sg 

38. Handicraft System go 

39. Domestic System 92 

40. Factory System 93 

41. Associated and Corporate Enterprise 95 

VH. Economic Development of the United States. 

42. References . 99 

43. Early Period of American Economic Life 99 

44. Growth of American Industry in the Nineteenth Century loi 

45. Recent Development of American Industry .... 104 

46. Modern Problems of America 106 

VIII. Development of Economic Thought. 

47. References 109 

48. Economic Theory in Classic Antiquity 109 

49. Mediaeval Economic Theory • , . . . 112 

50. The Mercantile Doctrine 115 

51. Adam Smith and the Physiocrats 118 

52. Ricardo and Modern Economics 121 



BOOK III. — CONDITIONS OF ECONOMIC LIFE. 

IX. Private Property. 

53. References 125 

54. Origin of Private Property 125 

55. Growth of Property in Land 128 

56. Theories of Private Property 131 

57. Limits of Private Property 134 

58. Content of Property Rights 136 

X. Competition. 

59. References 139 

60. Nature of Competition 139 

61. Forms of Competition 141 

62. Dangers of Competition 145 

63. Limits of Competition 147 

64. Substitutes for Competition 150 



Vlll 



Contents Parts II., III. 



Chapter Pagb 

XI. Freedom. 

65. References 154 

66. Origin and Growth of Slavery . -154 

67. Decay and Disappearance of Slavery 158 

68. Liberty of Economic Action 163 

69. Various Kinds of Economic Freedom 165 

70. Individual Liberty as a Social Concept 170 



Part III. 

STRUCTURE AND PROCESS OF ECONOMIC LIFE. 
BOOK L — VALUE; GENERAL PRINCIPLES. 

XII. The Meaning of Value. 

71. References 173 

72. Original Meaning of Value 173 

73. Marginal Utility — Law of Diminishing Utility . . . 175 

74. Individual and Social Value 179 

75. Value in Exchange 182 

76. Value and Price 1S4 

77. Value and Marginal Increments of Wealth 185 

XITI. The Measure of Value. 

78. References 189 

79. Meaning of Cost 189 

80. Individual and Social Cost 192 

81. Cost and Surplus 194 

82. Cost and Utility . 198 

83. Social Surplus and Progress . • . . ^ 201 

XIV. The Capitalization of Value. 

84. References .' 204 

85. Value and Rent 204 

86. Law of Depreciation 206 

87. Law of Future Estimates • • 209 

88. Law of Diminishing Returns . 211 

89. Forms of Value 214 

90. Value as a Differential 217 

91. Relation of Rental and Capital Values 219 



Part III. Contents 



IX 



Chapter Page 

XV. Determination of Market Value. 

92. References 222 

93. Demand and Supply 222 

94. Market and Normal Price 223 

95. Conditions of Exchange — Law of Comparative Utilities 

and Comparative Costs 225 

96. Rate of Exchange — Barter 226 

97. One Seller and One Buyer 228 

98. Monopoly 230 

99. Competition 233 

100. Conclusions 234 

XVI. Determination of Normal Value. 

loi. References 239 

102. Normal Demand — Elasticity of Demand 239 

103. Normal Supply — Cost of Production 242 

104. Law of Marginal or Maximum Cost 245 

105. Law of Minimum Cost 247 

io5. Elasticity of Supply — Law of Varying Cost .... 249 

107. Law of Joint Cost 251 

108. Equilibrium of Normal Demand and Normal Supply . 253 

109. Influence of Normal Price upon Market Price .... 254 
no. Normal Monopoly Value 255 

XVII. The General Law of Value. 

111. References 260 

112. Value and Cost of Production 260 

113. Value and Efficiency 262 

114. Efficiency and Capitalization 266 

115. Valuation and Taxation 2t 

116. Valuation and Regulation 27 

117. Valuation and Investment 273 



BOOK II. — V.\LUE AND PRODUCTION. 

XVIII. Character and Factors of Production. 

118. References 275 

119. Production : Its Meaning and Relation to Consumption 275 

120. Kinds of Production 278 

121. Factors of Production 280 

122. Production and the Producer 282 



X Contents Part ill. 

Chapter Page 

XIX. Labor. 

123. References 285 

124. Meaning of Labor 285 

125. Cost of Labor 286 

126. Efficiency of Labor 289 

127. Division of Labor — Nature and Advantages .... 290 

128. Division of Labor — Defects 294 

129. Combination of Labor 296 

130. Supply of Labor 298 

XX. Land. 

131. References 300 

132. Land as a Separate Factor of Production 300 

133. Fertility of Land . . . .' 303 

134. Situation of Land 306 

135. Cultivation of Land 309 

XXI. Capital. 

136. References 313 

137. Kinds of Capital 313 

138. Function of Capital 316 

139. Creation and Growrth of Capital 319 

140. Nature and Influence of Capital 321 

141. Investment of Capital 324 

XXII. Enterprise — The Concentration of Production. 

142. References 329 

143. The Meaning of Concentration 329 

144. Large-Scale Production 331 

145. Large-Scale Agriculture 334 

146. Consolidation and Integration of Production .... 337 

147. Growth of Combination 340 

148. Effects of Combination 344 

149. Limits of Combination 347 

BOOK IIL — VALUE AND DISTRIBUTION. 

XXIII. Profits. 

150. References 351 

151. The Shares in Distribution 351 

152. Ordinary Profits 353 

153. Aleatory Profits 357 



Part III. Contents xi 

Chapter Pack 

XXIII. Profits (Continued). 

154. Speculative Profits : Nature 359 

155. Speculative Profits : Function 363 

156. Monopoly Profits 366 

157. Regulation and Justification of Profits 368 

XXIV. Rent. 

158. References 371 

159. Nature of Rent 371 

160. Relation of Land Rent to Other Rents 373 

161. Rent and Price 376 

162. Growth of Land Rent 379 

163. Land Rent and Land Tenure 383 

164. Justification of Land Rent 388 

XXV. Interest. 

165. References 392 

166. Nature of Interest 392 

167. Interest and Forbearance 396 

168. Interest and Productivity 399 

169. Course of Interest 403 

170. Tendency of Interest to a Minimum 405 

171. Regulation of Interest 408 

XXVI. Wages. 

172. References 411 

173. Nature of Wages 411 

174. Wages and Cost 414 

175. Wages and Efficiency 416 

176. Rate of Wages 419 

177. Course of Wages • 420 

178. Variations in Wages 422 

179. Wages and Profits 427 

XXVII. Wages. — The Labor Problem. 

180. References 429 

181. Labor Legislation 43" 

182. Labor Organizations: Object and Functions .... 434 

183. Labor Organization : Methods 439 

184. Profit Sharing and Co-operation 442 

185. Arbitration and Conciliation 445 



xii Contents Part iir. 

BOOK IV. — VALUE AND EXCHANGE. 

Chapter Page 

XXVIII. Money. — Nature and Value 

i86. References 448 

187. Origin and Functions of Money 449 

188. Kinds of Money 452 

189. Value of Money 456 

190. Nature of the Monetary Demand , . 458 

191. Changes in the Monetary Demand 461 

192. The Monetary Supply 463 

193. The Quantity Theory 466 

194. Commodities and the Price Level 468 

195. Index Numbers 470 

196. Distribution of Money . 473 

197. Stability of Money 476 

XXIX. Money. — Practical Problems. 

198. References 481 

199. Coinage Problems 481 

200. Gresham's Law 486 

201. Production of the Precious Metals 488 

202. Choice of the Money Standard 493 

203. Embarrassments of Bimetallism 496 

204. The Struggle for Silver 498 

205. Abandonment of the Silver Standard . 502 

206. Adoption of the Gold Standard 507 

207. Paper Money 509 

XXX. Credit and Banking. 

208. References 518 

209. Nature of Credit 518 

210. Instruments of Credit 521 

211. Development of Banking 524 

212. Modern Bank Operations 530 

213. Bank Statements 536 

214. The Deposit and Check System 539 

215. Bank Reserves 543 

216. Credit and Prices 550 

XXXI. Credit and Currency. 

217. References 554 

218. Banks of Issue , 554 

219. Regulation of Note Issues 561 

220. Early American Systemis 566 



Part III. Contents 



Xlll 



Chapter Page 

XXXI. Credit and Currency {Continued). 

221. The National Banks 569 

222. The Money Rate 572 

223. The Money Market 576 

224. Currency Reform 580 

225. Credit and Crises 583 

XXXII. International Trade. 

226. References 587 

227. Basis of International Trade 587 

228. Rate of International Exchange 593 

229. Growth of Free Trade 597 

230. The Argument for Protection 601 

231. The Argument for Free Trade 606 

232. Conclusion 60S 

XXXIII. Transportation. 

233. References 613 

234. Transmission of Intelligence — The Post-Ofifice . . .613 

235. Railway Development 616 

236. Nature of Railway Business 620 

237. Principle of Railway Charges 624 

238. Classification 628 

239. Personal Discrimination 631 

240. Local Discrimination 632 

241. Railway Regulation 637 

XXXIV. Insurance. 

242. References 641 

243. Nature of Insurance 641 

244. Growth of Insurance 644 

245. Theory of Insurance 649 

246. Methods and Regulation of Insurance 652 



xiv Contents Part iv. 



Part IV. 



CONCLUSION. 

Chapter Page 

XXXV. Government and Business. 

247. References 655 

248. Socialism 655 

249. Development of Public Ownership 658 

250. Conditions of Public Ownership 662 

251. Municipal Monopolies 666 

252. Government Regulation 669 

253. Bounties and Subsidies 672 

XXXVI. Poverty and Progress. 

254. References 675 

255. Luxury 676 

256. The Facts of Poverty 680 

257. The Causes of Poverty 684 

258. Relief of Poverty 687 

259. Prevention of Poverty 690 

260. The Future of Economic Life 693 

261. The Role of Economics 697 

INDEX 701 



Maps and Diagrams 

Page 

Distribution of Population in 1900 . . . colored, facing 50 

Number of Inhabitants to the Square Mile, 

by States and Territories " 52 

Population according to Age Distribution 54 

Foreign Immigration to the United States, 

1840-1908 following 58 

Increase of Population in Principal Coun- 
tries of Europe facing 59 

Population : 

(i) Total Foreign Born at each Census") 

(2) Proportion each of leading nation- > colored, following 60 
alities and foreign born . . .) 

Constituents of the Population of States 

and Territories, 1900 colored, " 62 

Production of Corn > y- • . ^ 

>-,.,,, facine 102 

Production of Wheat > ^ ^ 

Production of Oats 7 "10^ 

Production of Cotton ) 

Capital Invested at each Census > <4 

Average Number of Wage Earners > 

Value of Products } "101: 



\ 



Proportion of Wage Earners to Population 
Annual Production of Iron Ore in the United 

States " 106 

Hand and Machine Labor Selected Units (d) ... " 294 
Hand and Machine Labor Selected Units (J?) ... " 295 

Wages, Hours of Work, etc colored, " 422 

Results of Strikes, etc colored, " 440 

Relative Wholesale and Retail Price of Food, 

1890-1907 "470 

Relative Wholesale and Retail Price of Fresh 

Beef, 1890-1903 "470 

XV 



XVI 



Maps and Diagrams 



Page 

Relative Prices of Raw and Manufactured 

Commodities, 1890-1908 facing 471 

Comparative Movement of Wholesale Prices, 

1878-1901 " 471 

Production of Silver, 1 875-1907 . " 490 

Production of Gold and Silver, 1845-1907 .... " 490 

Production of Gold, 1 875-1 903 "491 

Bank Notes, Paper Money, etc., 1878-1908 ... " 516 

Merchandise Exported and Imported " 591 

Reduction of Freight Rates, 1867-1900 .... following 621 
Percent of Total Expenditure, etc.. Normal 

Families colored, facing 681 

Poverty Chart (reproduced by permission 

from Rowntree's " Poverty ") 686 



SUGGESTIONS FOR STUDENTS AND 
GENERAL REFERENCES. 

I. General Treatises in English. 

Of the older works the treatises of Adam Smith and of some 
of the so-called Classical School are still indispensable to stu- 
dents. The three founders are : 

Smith, Adam. Ati Inquiry itiio the Nature and Causes of the 
Wealth of Nations. (London, 1776; best modern edition, with 
introduction, notes, marginal summary and enlarged index by 
^ Edwin Cannan, 2 vols., 1904.) 

Malthus, Thomas Robert. An Essay on the Principle of 
Population, or a View of its Past and Presetit Effects on Human 
Happiness. (London, 1798; 8th ed., 1878.) 

Ricardo, David. Principles of Political Economy atid Taxation. 
(London, 181 7.) — This work, together with his other important 
writings, has been edited by J. R. McCuUoch in one volume 
under the title of The Works of David Ricardo with a Notice 
of the Life and Writitigs of the Author. (1846; frequently 
reprinted since.) 

The principal modern expounders of the general system set 
forth by Smith, Malthus and Ricardo are : 

Mill, John Stuart. Principles of Political Economy with some 
of their Applications to Social Philosophy. (London, 1848; 5th 
ed., 1880.) — This was the most widely read work from 1850 to 
1890. 

Senior, Nassau William. Political Economy. (London, 1850; 
6th ed., 1872.) — Acute and original. 

Cairn ES, J. E. Sotne Leading Principles of Political Econofny 
newly Expounded. (London, 1874.) — Abstract, but remarkably 
able. 

b xvii 



xviii Suggestions. 

SiDGWiCK, Henry. The Principles of Political Economy. (Lon- 
don, 1883.) — Critical and philosophical, but somewhat remote 
from actual life. 

The reaction against the Classical School was inaugurated in 
England by 

Jevons, W. Stanley. The Theory of Political Economy. (Lon- 
don, 1871 ; 3d ed., 1888.) —A work of the first magnitude. The 
same author's posthumous Priticiples of Economics (London, 
1905) is only a torso. 

Of modern treatises the best are as follows : 

Marshall, Alfred. Principles of Economics. (Vol. I, London, 
1890; 5th ed., 1907.) — The fullest and most elaborate of recent 
works. 

PlERSON, N. G. Principles of Economics. (Translated by A. A. 
Wotzel. Vol. I, London, 1902.) — Dr. Pierson was formerly 
Prime Minister of the Netherlands. A virile work, especially 
strong in the financial sections. Vol. II may be expected soon. 

Nicholson, J. Shield. Principles of Political Economy. (3 
V vols., London, 1893-1901.) — On the lines of Mill, but brought 
down to date and with much historical material. 

Pantaleoni, Maffeo. Pure Economics. (Translated by T. 
Boston Bruce. London, 1898.) — An acute and profound work 
on fundamental principles. 

Flux, A. N. Econotnic Principles. An Introductory Study. 
(London, 1904.) — A solid production on rather conservative 
lines. 

Bohm-Bawerk, Eugen von. The Positive Theory of Capital. 
(Translated by W. Smart. London, 1891.) — Professor Bohm- 
Bawerk was formerly Austrian Minister of Finance. 

Wieser, Friedrich von. Natural Value. (Translated by 
C. Malloch, London, 1893.) — This book and the one immedi- 
ately preceding are the two chief works of the Austrian School, 
whose views are akin to those of Jevons. 

Of American treatises the most important are : 

Walker, Francis A. Political Economy. (New York, 1883 ; 
^ 3d ed., 1888.) — Until recently the chief American production. 



/ 



Treatises in English. xix 

Clark, John B. The Distribution of Wealth. (New York, 1899.) 
— Of fundamental and epoch-making importance. The same 
author's Essentials of Economic Theory (New York, 1907) covers 
a broader field. 

Hadley, Arthur Twining. Economics: An Account of the Re- 
lations between Private Property and Public Welfare. (New York, 
1896.) — Admirably written, but with a not entirely satisfactory 
arrangement. 

Bullock, Charles Jesse. Introduction to the Study of Economics. 
(New York, 1897; 3d ed., 1908.) — Clear and sensible. 

Ely, Richard T. Outlines of Economics. (New York, 1893 ; new 
ed., revised by the author and T. S. Adams, M. O. Lorenz, and 
A. A. Young, 1908.) — In its new form, valuable and interesting. 

Seager, Henry Rogers. Introduction to Economics. (New York, 
1904; 3d ed., 1906.) — Displays a firm grasp of theory and a wide 
acquaintance with facts. In many respects the most available of 
existing text-books. The same author has also published Economics. 
Briefer Course (New York, 1909). 

Fetter, Frank A. The Principles of Economics. (New York, 
1904.) — Novel and suggestive. 

During the past i&^ years a number of series for more pop- 
ular consumption have appeared. They are not yet completed, 
and the vi^hole number of volumes is not yet definitely settled. 
Among these are: Appleton's Business Series, Methuen's 
Books on Business, Macmillan's Citizen's Library of Economics, 
Politics and Sociology, and the American Social Progress 
Series, Longman's American Citizen Series, Holt's American 
Public Problem Series, Putnam's Questions of the Day, and 
Ginn's Selections and Readings in Economics. 

On American Economic History attention is called especially 
to A Documentary History of American Industrial Society, 
under the auspices of the American Bureau of Industrial Re- 
search (Cleveland, 10 vols., 1909-1910), and The Economic 
History of the United States, under the auspices of the Carnegie 
Institution (about 10 vols., 1910-). 

Worthy of mention are two recent works on modern business : 



XX Suggestions. 

Hatfield, H. R., ed. Lectures on Commerce (Chicago, 1904; 3d ed., 
1906).^ — For American conditions. 

Ashley, W. J., ed. British Industries, a Series of General Reviews 
for Business Men and Students (London, 1903; 2ded., 1906). — 
For English conditions. 

The more important works on special topics will be found in 
the References at the head of each chapter. 



II. General Treatises in Foreign Languages. 

The leading foreign works are: 

Wagner, Adolf. Grundlegung der Politischen Oekonomie. (3 vols., 
Leipsic; 3d ed., 1892-1894.) — By the chief advocate of "Pro- 
fessorial Socialism." Erudite, with remarkable bibliographies. 
A French translation appeared in 1905. 

RoscHEE, Wilhelm. Grundlagen der Nationalokonomie. Ein 
Hand- und Lesebuch. (5 vols., Stuttgart, 1854-1894; with new 
editions of the earlier volumes almost every year until his death 
in 1894.) — By one of the founders of the Historical School. 
Contains an imposing array of historical notes. The first volume 
has appeared in English dress in 2 volumes. 

CoHN, GusTAV. Grundlegung der Nationalokonomie. Ein Lehr- 
buch fur Studirende. (3 vols., Stuttgart, 1885-1898.) — By the 
best stylist among the German economists. Conservative and 
interesting. The second volume has been translated into English 
under the title The Science of Finance. 

ScHMOLLER, GusTAv. Grundriss der allgemeinen Volkswirth- 
schaftslehre. (2 vols., Leipsic, 1900-1904; 2d ed., 1908.) — A 
remarkable work by the present leader of the Historical School. 
Brilliant and fascinating, but weak in the theoretical parts. A 
French translation was published in 1905. 

Philippovich, Eugen von. Grundriss der Politischen Oekonomie. 
(3 vols., Tubingen, 1893-1907; 6th ed., 1909.) — Sane, impartial 
and concise. In many respects the best German work. 



Foreign Treatises. xxi 

Leroy-Beaulieu, Paul. Traite Theorique et Pratique d'Economie 
Politique. (4 vols., Paris, 1895; 4th ed., 1905.) — A pellucid 
work by the chief of the Orthodox School in France. 

GiDE, Charles. Principes d'Economie Politique. (Paris, 1887; nth 
ed., 1908). — The most widely read European text-book. Ameri- 
can translations appeared in 1889 and 1904. The author's Cours 
d'Economie Politique (Paris, 1909) is an enlarged version of the 
same book. 

Landry, Adolphe. Manuel d'Economiqtie. (Paris, 1909.) — The 
best French work. 

Pareto, Vilfredo. Cours d'Economie Politique prof esse a I'Uni- 
versite de Lausanne. (2 vols., Lausanne, 1896-1897.) — An acute 
work, by an Italian, attempting to combine the mathematical 
point of view with historical details. The author's Manuel d'Econo- 
mie Politique (Paris, 1909) is a translation of a briefer Italian work 
on the same lines. 



III. Periodicals. 

Classified by countries the chief periodicals are as follows: 
United States. 

American Economic Association Publications. This Association, 
formed in 1886, includes the leading American economists and a 
large number of prominent laymen. The publications include 
the Reports of the Proceedings of the Annual Meetings and a series 
of independent monographs on every phase of economics. Up to 
1897 these were published at bi-monthly intervals, and were col- 
lected in eleven volumes. In 1897 a series of shorter Studies was 
inaugurated, and larger volumes were occasionally published 
under the name of New Series. In 1901 the Studies were discon- 
tinued, and a Third Series of more elaborate monographs was 
commenced, published at quarterly intervals and still in progress. 
In 1908 a quarterly periodical known as The Economic Bulletin 
was added. 



xxii Suggestions. 

The Quarterly Journal of Economics. Published for Harvard Uni- 
versity. (Boston, 1886-.) 

Political Science Quarterly. Edited by the Faculty of Political 
Science of Columbia University. (New York, 1886-.) 

The Annals of the American Academy of Political and Social Science 
(Bi-monthly, Philadelphia, 1890-.) 

The Yale Review. A Quarterly Journal for the Scientific Discus- 
sion of Economic, Political and Social Questions. (New Haven, 
1892-.) 

The Journal of Political Economy. Published for the University of 
Chicago. (Quarterly to 1906, monthly thereafter, Chicago, 
1892-.) 

The American Journal of Sociology. (Bi-monthly, Chicago, 1896-.) 

The International Socialist Review. (Monthly, Chicago, 1901-.) 

Quarterly Publications of the American Statistical Association. 
(Boston, 1888-.) 

Journal of Social Science. (Boston, 1869-.) Containing the Trans- 
actions of the American Social Science Association. 

Sound Currency. (7 vols.. New York, 1895-1902.) Edited by the 
Reform Club Sound Currency Committee. 

Municipal Affairs. (6 vols., New York, 1897-1903.) Edited by 
the Reform Club Committee on City Affairs. 

Johns Hopkins University Studies in Historical and Political Science. 
(Baltimore, 1883-. One volume a year, composed of twelve 
numbers. 28 vols, and several extra volumes to 1910.) 

Columbia University Studies in History, Economics and Public 
Law. Edited by the Faculty of Political Science. (New York, 
1891-. Several volumes a year, each consisting of from one to 
four monographs. 37 vols. [100 monographs] to 1910.) 

Michigan Political Science Association Publications. (Ann Arbor, 
1893-. 6 vols, to 1910.) 

University of Wisconsin Bulletin. Economics and Political Science 
Series. (Madison, 1904-. 5 vols, to 1910.) 



American Periodicals xxiii 

University of Pennsylvania Series in Political Economy and Public 
Law (Philadelphia, 1888-. 22 monographs to 1910.) 

Harvard Economic Studies. (Boston, 1906-. 4 vols, to 1910.) 

Cornell Studies in History and Political Science. Vol. I, 1907. 

University of California, Publications in Ecotiomics. Vol. I, 1908. 



Economic articles of more or less permanent interest are 
also found in the monthlies like the North American Review, 
Forum, American Monthly Review of Reviews, Atlantic Monthly, 
and in the weeklies like the Nation, Outlook, Independent and 
the Survey. The special periodicals and publications devoted 
to particular economic interests are too numerous to mention. 
Some of them vnll be found below under Section VI, Semi- 
official Publications. 

Great Britain. 

The Economic Journal. (Quarterly, London, 1890-.) The Jour- 
nal of the British Economic Association, since 1903 called The 
Royal Economic Society. 

The Economic Review. (Oxford, 1891--.) Published quarterly 
for the Oxford University Branch of the Christian Social Union. 

Journal of the Royal Statistical Society. (Quarterly, London, 
1837-) 

The monthlies like the Contemporary Review, Fortnightly 
Review, National Review, Nineteenth Century, Independent 
Review; and the British Quarterly and Edinburgh Reviews 
generally contain some articles of economic interest. The most 
important weekly devoted entirely to current economic topics 
is The Economist. 

Germany. 

Jahrbucher fur Nationalokonomie und Statistik. (Monthly, Jena, 
1863-.) Edited by Conrad. 



xxiv Suggestions. 

Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirthschaft. 
(Quarterly, Leipsic, 1877-.) Edited by Schmoller. 

Zeitschrift fiir die gesammie Staatswissenschaft. (Quarterly, 
Tubingen, 1844-.) Edited by Biicher. 

Archiv fiir Sociale Gesetzgebung und Statistik. (Quarterly, Berlin, 
1888-1903.) Edited by Braun. Continued as: 

Archiv fur Sozialwissenschaft und Sozialpolitik. Quarterly, Tubin- 
gen, 1904-.) Edited by Sombart, Weber and Jaffe. 

Zeitschrift fur Sozialwissenschaft. (Quarterly, Berlin, 1898-.) 
Edited by Wolf. 

Vierteljahrschrift fur Sozial- und Wirthschaftsgeschichte. (Quarterly, 
1904-.) Edited by Bauer, Below and Hartmann. 

Zeitschrift fur die gesammte V ersicherungswissenschaft. (1900-.) 

Finanz- Archiv. (Quarterly, Stuttgart, 1884-.) Edited by Schanz. 

Archiv fiir Eisenbahnwesen. (Monthly, Berlin, 1875-.) Edited by 
von der Leyen. 

Thunen Archiv. (Jena, 1905-.) Edited by Ehrenberg. 

Die neue Zeit. (Monthly, Stuttgart, 1883-.) Edited by Kautsky. 

Documente des Sozialismus. (Monthly, Stuttgart, 1901-1905.) 
Edited by Bernstein. 

Marx Studien. (Vienna, 1905-.) Edited by Adler and Hilferding. 

Publications of the Verein fiir Sozialpolitik. (Several volumes a 
year, Leipsic, 1873-.) 

Staats- und sozialwissenschaftliche Forschungen. (Leipsic, 1878-.) 
Edited by Schmoller [and since 1905 by Sering]. 

Sammlung nationalokonomischer und statistischer Abhandlungen des 
staatswissenschaftlichen Seminars zu Halle. (Jena, 1877 -.) Ed- 
ited by Conrad. 

Miinchener volkswirthschaftliche Studien. (Stuttgart, 1893-.) Edited 
by Brentano and Lotz. 

Annalen des deutschen Reichs fur Gesetzgebung, Verwaltung und 
Volkswirthschaft. (Monthly, Munich, 1868-.) Edited by Ehe- 
berg and Dyraff. 



Foreign Periodicals. . xxv 

Abhandlungen aiis dem slaalsivissenschaftlichen Seminar von Slrass- 
burg. (Strassburg, 1893-.) Edited by Knapp. 

Socialgeschichtliche Forschungen. (Weimar, 1896-.) Edited by 
Bauer and Hartman. 

Siaatswissenschaftliche Sttidien. (Leipsic, 1893-.) Edited by Elster. 

Volkswirthschaftliche Abhandlungen der Badischen Hochschulen. 
(Freiburg '/B., 1897-.) Edited by Fuchs, Schulze-Gavernitz and 
Weber. 

Berner Bcitrage ziir Geschichte der Nationalokonotnik. (Bern, 
1886-.) Edited by Oncken. 



France. 

Journal des Economistes. (Monthly, Paris, 1843-.) Edited by 
Molinari. 

Revue d'Economie Politique. (Monthly, Paris, 1887-.) Edited by 
Cauwes, Gide and Martin. 

Revue d'Histoire des Doctrines Economiques et Sociales. (Quarterly, 
Paris, 1908-.) Edited by Deschamps and Dubois. 

Revue de Science et de Legislation Financiere. (Bi-monthly, Paris, 
1903-.) Edited by Boucard, Jeze and Morel. 

Reforme Sociale. (Paris, 1880-.) Bulletin of the Societe d'Economie 
Sociale. 

Bulletin de Statistique et de Legislation comparee. (Monthly, Paris, 
1877-.) 

Annales des Sciences Politiques. (Bi-monthly, Paris, 1886-.) 

Journal de la Societe de Statistique de Paris. (Monthly, Paris, 
1860-.) 

Travaux Juridiques et Economiques de VUniversite de Rennes. 
(Rennes, 1906-.) 

Revue Internationale de Sociologie. (Monthly, Paris, 1893-.) Edited 
by Worms. 

Musee Social. Annales and Memoir es et Documents. (Monthly, 
Paris, 1 896-.) 



xxvi ^ Suggestions. 

U Economiste Frangais. (Weekly, Paris, 1876-.) Edited by P. Leroy- 
Beaulieu. 

Italy. 

Giornale degli Economisti. (Monthly, Padova, 1875-1878 and again 
Bologna and Rome, 1886-.) Edited by Viti de Marco, Pantaleoni 
and Montemartini. 

Bulletin de Vlnstitut International de Statistique. (Biennially, Rome, 
1886-.) Edited by Bodio. 

Belgium. 

Revue Economique Internationale. (Bi-monthly, Brussels, 1904-.) 
Edited by Hennebicq. 

Austria. 

Zeitschrift fur Volkswirthschaft, Socialpolitik und Verwaltung. 
(Quarterly, Vienna, 1892-.) Edited by Bohm-Bawerk, Philip- 
povich, and others. 

Wiener staatswissenschaftliche Studien. (Freiburg '/B., 1898-.) 
Edited by Bernatzik and Philippovich. 



Holland. 

De Economist. (Monthly, The Hague, 1852-.) Edited by 
Bruyn-Kops. 

Denmark. 

Nationoekonomisk Tidsskrift. (Quarterly, Copenhagen, 1873-.) 
Edited by Jensen. 



IV. Dictionaries and Cyclopedias of Economics. 

Palgrave, R. H. Inglis, ed. Dictionary of P'olitical Economy. 
(3 vols., London, 1894-1899, with a supplement, 1908.) — An ad- 
mirable work, but not devoting special attention to American con- 
ditions. 



Local Documents. xxvii 

Bliss, William D. P., ed. The Encyclopedia of Social Reform, in- 
cluding Political Economy, Political Science, Sociology and Statis- 
tics. (New York, 1897; 2d ed., 1908.) — Serviceable. 

Lalor, John J., ed. Cyclopedia of Political Science, Political 
Economy and United States History. (Chicago, 3 vols., 1882.) — ■ 
Inadequate for economics and now somewhat out of date. 

Conrad, Elster, Lexis and Loening, eds. Handworterbuch der 
Staqtswissenschaften. (6 vols., Jena, 1890-1894; 3ded., 1908-.) — 
The most complete and elaborate cyclopedia of economics in 
existence. 

Elster, Ludwig, ed. Worterhuch der Volkswirthschaft. (2 vols., 
Jena, 1898; 2d ed., 1907.) — Of more importance to continental 
students. 

ScHONBERG, GusTAV. Handbuch der Politischen Oekonomie. (3 
vols., Tubingen, 1882; 4th ed., 1896-1898.) — Comprises a series 
of thorough and valuable monographs by the leading German 
specialists. 

Staatslexikon. Edited by the Gorres Society. (Freiburg ^/B., 
1889-1897, 5 vols.) — From the Catholic point of view. 

Stegmann and Hugo. Handbuch des Sozialismus. (Zurich, 1897.) 
— A Socialist Cyclopedia. 

Block, M. Petit Dictionnaire Politique et Social. (Paris, 1896.) — 
Not very elaborate. 

Say, Teon, and Chailley, Joseph, eds. Nouveau Dictionnaire 
d'Economie Politique. (2 vols., Paris, 1891-1892.) — Inferior to 
both Palgrave and Conrad. 



V. Government Documents. 

A. Local and State Publications. 

A large amount of material on economic topics is published 
by the various American governments, — local, state and na- 
tional. The municipal governments of the chief American 
cities publish annually reports of their various city depart- 



xxviii Suggestions. 

ments. Among them, of economic interest, are the reports 
dealing with city finances, water, gas and electricity, charities, 
health, housing, transportation and the Hke, and in a few cases 
like Boston and New York the reports of the Departments or 
Bureaus of Municipal Statistics. Few of the reports reach the 
high level exemplified by the New York Report of the Tenement 
House Department for 1904, the Cleveland Report of the Water 
Works Division of the Board of Public Service, or the Boston 
Report of the Finance Commission for 1909. The state govern- 
ments publish the reports of labor bureaus. Of these, the best 
are those of New York and Massachusetts; but New Jersey, 
Pennsylvania, Illinois and a few others issue fairly good re- 
ports. The annual reports of the New York Department of 
Labor appear in three volumes, containing (i) the General 
Report of the Commissioner and the Report of the Bureau of 
Mediation and Arbitration, (2) the Report of the Bureau of 
Labor Statistics, and (3) the Report of the Bureau of Factory 
Inspection. Occasionally special reports are published, as on 
Labor Legislation, Employers^ Liability, Welfare Institutions, 
Old Age Pensions, etc. 

The reports of the Massachusetts Bureau of Statistics of 
Labor comprise the Annual Report on the Statistics of Labor, 
the Annual Report on the Statistics of Manufactures and vari- 
ous Special Reports. 

Both New York and Massachusetts also pubhsh periodical 
bulletins, the Labor Bulletin of Massachusetts appearing every 
two months, the Department of Labor Bulletin of New York 
appearing quarterly. The reports of the other states are not 
so valuable or voluminous, but often contain matter of im- 
portance. An Analysis and Index of all Reports issued by 
State Bureaus of Labor Statistics was published by the Na- 
tional Department of Labor in 1893, and has since then been 
brought down to date from time to time. The separate states 
publish in turn the annual proceedings of the National Conven- 
tion of Chiefs and Commissioners of the various Bureaus of 
Statistics of Labor in the United States, as well as of the Inter- 
national Association of Factory Inspectors, of North America. 



Local Documents. xxlx 

The state governments also publish regularly the State 
Treasurers^ and Comptrollers' Reports, Reports of Railroad 
Commissions, Reports of Bank and Insurance Examiners, Re- 
ports on Taxation, Reports of Inspectors of Food and Animals, 
Reports of Boards of Charities and Correction, Reports on 
Prison Labor, Reports on Mining Statistics, Reports of State 
Agricultural Experiment Stations, Reports of the Boards of 
Health, Reports of the Public Service Commissions and the 
like. A few also publish at regular intervals a State Census: 
the best is that of Massachusetts. 

Some of the states publish occasional reports of legislative 
or special committees. Of these the most common are the 
Reports on Taxation. A complete list of these will be found 
in the chapter on "Recent State Reports on Taxation" in 
Essays in Taxation by the author of this volume. Deserving 
of mention on other topics are the Massachusetts Reports on 
The Unemployed (1895) ; Street Railway Companies (1901) ; 
Corporation Laws (1903) ; Old Age Pensions (1909) ; and the 
New York Reports on Tetiemcnt Houses (1894 and 1901) ; 
Trusts (1897) ; Canals (2 vols., 1899) ; Insurance (8 vols., 
1 905- 1 906) ; Stock and Produce ExcJianges (1909) ; Employers' 
Liability and Unemployment (19 10). 

Practically the only general guides to the legislation discussed 
in these reports are the exceedingly valuable Annual Compara- 
tive Summary and Index of State Legislation and the Annual 
Review of Legislation, both published by the New York State 
Library. These cover the entire country and contain an ac- 
curate and well-digested survey of the whole field of state 
legislation. 

The Legislative Reference Department of the Wisconsin Free 
Library Commission has published since 1905, under the 
editorship of C. McCarthy, a number of valuable Comparative 
Legislative Bulletins containing judicial decisions as well as the 
legislation of the chief foreign countries and the American 
commonwealths on various economic questions. 



XXX Suggestions. 

B. National Departmental Publications. 

The publications of the national government are of three 
kinds: regular departmental issues, special departmental re- 
ports and reports of congressional committees. 

The Department of Commerce and Labor, organized in 
1903, now publishes by far the largest mass of material of inter- 
est to students of economics. In addition to numerous new 
duties, it took over much work previously devolving upon 
other departments. For details see the Organization and Law 
of the Department of Commerce and Labor (1904 716 pages, 
with full histories). Various additional changes were subse- 
quently made. 

The Department publishes annually the Report of the Secre- 
tary. The other publications are issued by the separate bu- 
reaus or divisions as follows: 

I. The Bureau of the Census. The Census is published 
every ten years. The most recent issues are The Tenth Census 
(1880, in 24 vols.), The Eleventh Census (1890, in 28 vols.), 
The Twelfth Census (1900, in 16 vols.). The Thirteenth Census 
(1910, in progress). The permanent Census Bureau, organ- 
.ized in 1902, publishes in addition to the annual Report of the 
Director, a large number of Bulletins (about no up to 19 10) 
and Special Reports. These are of six classes : 

A. Decennial: Transportation hy Water (1908); Express 
Business (1908); Fisheries Industry (as of 1907); Savings 
Banks ; Criminal Judicial Statistics. 

B. Quinquennial: Manufactures (4 vols., 1907-1908, as of 
1905) ; Electrical Industries (as of 1907) ; Agriculture. 

C. Biennial: The Official Register of the U. S. (2 vols., 
1908), transferred in 1907 from the Department of the Interior. 

D. Annual: Mortality Statistics (8th report, 1909); Statis- 
tics of Cities (6th report, 1909) ; Cotton Statistics (7 th report, 
1909) ; Census of the Lumber Cut. 

E. Semi-Monthly : Cotton Ginned. 

F. Occasional : Among the most important are: Mines and 
Quarries (1905) ; Street and Electric Railways (1905) ; Benevo- 



Departmental Publications. xxxi 

lent Institutions (1905) ; Wealth, Debt and Taxation (1906) ; 
Telephones and Telegraphs (1906) ; Insane (1906) ; Paupers 
(1906); Prisoners (1907); Women at Work (1907); Marriage 
and Divorce (2 vols., 1908- 1909). 

The Census Bureau has also published the Philippine Census 
(4 vols., 1905) ; the Cuban Census (1908), and the Proceedings 
of the Conference of Governors on the Conservation of the 
Natural Resources (1909). It has reprinted in part the First 
Census of 1790 and has in preparation reports on Water Power; 
State, County and Municipal Securities; and Population and 
Industrial Centres. 



2. The Bureau of Statistics publishes, in addition to the 
annual Report of the Chief: (a) the annual quarto Report on the 
Foreign Commerce and Navigation of the United States in two 
bulky volumes, also including much detailed information on 
internal commerce and general economic conditions; (b) the 
annual octavo Statistical Abstract of the United States, a valuable 
condensed compilation; (6) a monthly quarto Summary of 
Commerce and Finance of the United States, often containing 
monographs on special topics; among v^'hich may be men- 
tioned those on Colonial Administration, Modern Tariff Sys- 
tems, Wholesale Prices in Great Britain and the United States, 
Reciprocity Treaties, Great Canals of the World; (d) a monthly 
Summary of Internal Commerce; and (e) occasional reports on 
special topics of domestic importance, like the Report on Lake 
Commerce (by Tunnell, 1895), various Reports on Wool and 
Manufactures of Wool (1887, 1888, 1894), the Report on the 
Warehousing Industry in the United States (1904). The 
Bureau also publishes the Statistical Abstract of the World. 
Section i (total imports and exports by years) and section 2 
(total imports and exports by countries) appeared in 1904. 
Section 3 (principal articles imported and exported by each 



xxxii Suggestions. 

country for a ten-year period) appeared in 1907. Section 4, 
including miscellaneous information, is in preparation. 



3. The Bureau of Labor publishes since 1886 an annual 
report and since 1889 special reports. The annual reports are 
as follows: (i) Industrial Depressions (1886); (2) Convict 
Labor (1887) ; (3) Strikes and Lockouts (1888) ; (4) Working- 
men in Large Cities (1889) ; (5) Railroad Labor (1890) ; (6) 
Cost of Production, Iron, Steel, Coal, etc. (1891) ; (7) Cost of 
Production, Textiles and Glass (2 vols., 1892) ; (8) Industrial 
Education (1893) ; (9) Building and Loan Associations (1894) ; 
(10) Strikes and Lockouts (2 vols., 1894); (11) Wages of Men, 
Women and Children (1897) ; (12) The Liquor Problem (1898) ; 
(13) Hand and Machine Labor (2 vols., 1899) ; (14) Water, Gas 
and Electric Light Plants (1900); (15) Wages in Commercial 
Countries (2 vols., 1900) ; (16) Strikes and Lockouts, 1881 to 
igoo (1901); (17) Trade and Technical Education (1902); 

(18) Cost of Living and Retail Prices of Food, 1903 (1904) ; 

(19) Wages and Hours of Labor (1905) ; (20) Convict Labor 
(1906); (21) Strikes and Lockouts, igoi to igoj (1907); (22) 
Labor Laws (1908) ; (23) Workingmen's Insurance in the U. S. 
(1909) ; (24) Workingmen's Insurance Abroad (1910). 



The special reports are as follows:' (i) Marriage and Divorce 
(1889); (2) Labor Laws of some States (1892; 2d ed., 1896); 
(3) Analysis and Index of all Reports issued by Bureaus of 
Labor Statistics in the United States (1893) ; (4) Compulsory 
Insurance in Germany (1893) ; (5) The Gothenburg System of 
Liqtior Traffic (1893) ; (6) The Phosphate Industry of the United 
States (1892) ; (7) The Slums of Baltimore, Chicago, New York 



Departmental Publications. xxxiii 

and Philadelphia (1894) ; (8) The Housing of the Working 
People (i8g 5); (9) The Italians in Chicago (iSg'j); (10) Labor 
Laws of the United States (1904); (11) Restriction of Output 
(1905) ; (12) Coal Mine Labor in Europe (1906). The Bureau 
has also published three Reports on the Laboring Classes in 
Hawaii (ioT igoi, 1902 and 1905); on Labor Disturbances in 
Colorado (1905) ; and on Hours of Work of Government La- 
borers (1905). It has in preparation a report on Women and 
Children in Industry. 

The Bureau also pubUshes a bi-monthly Bulletin of the 
Bureau of Labor, with valuable original articles, a survey of 
foreign statistical labor publications, the decisions of the courts 
affecting labor, and all new labor laws of the separate states. 



4. The Bureau of Manufactures publishes since 1905 
the annual Report of the Chief and a variety of reports containing 
information derived from abroad through the consular officers 
and transmitted to the Department of Commerce and Labor 
from the Department of State through the Bureau of Trade 
Relations. These reports were issued to 1903 by the Bureau of 
Foreign Commerce of the State Department and from 1903- 
1905 by tbe Bureau of Statistics. They now comprise (a) Com- 
mercial Relations, or the annual reports of consular officers on 
economic topics ; (b) Review of World's Commerce, a summary 
of the above; (c) a daily Bulletin, designed especially for the 
newspapers but also widely used by business men, known as 
Daily Consular and Trade Reports, containing reports from the 
consular officers as well as information from special agents and 
private investigators; (d) the monthly Constdar Reports, com- 
piled from the Daily Reports; (e) Special Constdar Reports, 
made in pursuance of special instructions. Among the forty 
odd volumes of such special reports the most important are 
those on Mortgages; Gas; Coal; Textiles; Sheep and Wool; 
India Rubber; Tariffs; Trusts and Trade Combinations; Streets 



xxxiv Suggestions. 

and Highways ; Steamship Subsidies; Fruit Culture; Trade 
Guilds; Commercial Travellers; Merchant Marines; Money 
and Prices; Industrial Education; Windmills and Storage 
Warehouses ; Cotton Seed Products; Woolen, Worsted and 
Shoddy; all of them treating of conditions abroad. The 
Bureau also publishes through the Tariff Division since 1907 
the Customs Tariffs of Foreign Countries, and since 1908 an 
annual Series of Trade of Foreign Countries. 



5. The Bureau of Corporations publishes since 1904 the 
annual Report of the Commissioner. It has also published spe- 
cial reports on the Beef Industry (1905) ; Transportation of 
Petroleum (1906); Petroleum Industry (2 vols., 1907); Cotton 
Exchanges (2 vols., 1908) ; Tobacco Industry (1909) ; Taxation 
of Corporations (1909) ; Transportation by Water in the United 
States (3 vols., 1909-10). 



6. The Bureau of Immigration and NAviGid^ioN (so 
called since 1906) publishes since 1892 the annual Report of the 
Commissioner-General. It consists of four divisions dealing 
with immigration in general, Chinese immigration, distribu- 
tion of immigrants and naturalization. The last two divisions 
publish separate reports. 

7. The Bureau of Fisheries publishes since 187 1 Bulletins 
and Reports on the Fisheries. It discontinued in 1906 the 
volume known as the Annual Report of the Bureau, with ap- 
pendices, and has since then published the Annual Report of 
the Commissioner of Fisheries in the general annual volume 
of the Department of Commerce and Labor, the other special 



Departmental Publications. xxxv 

reports appearing as separate Bureau of Fisheries Documents 
under the head of Fish Culture, Aquatic Biology, Statistics of 
the Commercial Fisheries, and Special Subjects. 

8. The Bureau of Navigation publishes since 1884 the 
Annual Report of the Commissioner, which contains a mass of 
material relating to domestic and foreign shipping. 

9. The Coast and Geodetic Survey publishes since 1816 
the Annual Report of tlie Superintendent, as well as numerous 
charts and maps. 

10. The Bureau of Standards was set off in 1901 from the 
Coast and Geodetic Survey, and publishes, in addition to the 
Annual Report of the Director, many circulars and bulletins 
relating to weights, measures, photometry, thermometry, py- 
rometry, polarimetry, radiometry, and the like. 

11. The Light-House Board publishes since 1859 a bulky 
annual report. 

12. The Steamboat- Inspection Service publishes since 
1852 the Annual Report of the Supervising Inspector-General. 

All of the above twelve Bureaus publish their reports proper 
in the Annual Report of the Secretary of Commerce and Labor, 
but the annual reports appear as separate volumes with addi- 
tional data in the case of The Bureau of Immigration and 
Naturalization, The Bureau of the Fisheries, The Bureau of 
Navigation, The Light-House Board, and The Steamboat In- 
spection Service. 



The Treasury Department issues the Annual Report of 
the Secretary of the Treasury, which contains a survey of the 
Finances, and includes the Reports of the Treasurer, the Register 
of the Treasury, the Director of the Bureau of Engraving and 
Printing, the Surgeon General, the Supervising Architect, the 
Superintendent of the Life-Saving Service, the Director of the 
Mint, the Comptroller of the Currency, and the Commissioner 



xxxvi Suggestions. 

of the Internal Revenue. These reports are also published 
separately, the last three in enlarged form and with voluminous 
tables. 

Among the numerous additional publications are the follow- 
ing : Division op Printing : Treasury Decisions (weekly and 
annual); Division of Bookkeeping: Estimat.s o Appro- 
priations (annual) ; Division of Customs : Customs Deci- 
sions (annual), Conference of Local Appraisers (annual) and 
Appeals Pending (quarterly) ; Comptroller of the Cur- 
rency : A hstracts of Reports of National Banks and Digest of 
Decisions; Bureau of the Mint: Report upon Production 
of Precious Metals (annual. Of international reputation), and 
Proceedings of the Assay Commission (annual) ; Commissioner 
OF Internal Revenue : The Gangers' Mamial and Digest of 
Decisions; Comptroller of the Treasury: Decisions 
(quarterly and annual). Numerous monthly, weekly and 
daily Statement Sheets are also issued on the condition of the 
finances. A useful compilation is the Principal Laws relating 
to Loans and Currency (1900, with reissues from time to time). 



The Department of Agriculture publishes the annual 
Report of the Secretary, the Yearbook of the Department, with 
many original articles and a great variety of documents sep- 
arately issued by the various bureaus. Of these the most im- 
portant are the Bureau of Animal Industry; the Bureau 
OF Plant Industry, with separate divisions publishing 
Vegetable Pathology and Physiology Bulletins, Botany Bulletins, 
Agrostology Bulletins, and Pomology Bulletins; the Forest 
Service; the Bureau of Chemistry; the Bureau of Soils; 
the Bureau of Entomology; the Bureau of Biological 
Survey; the Bureau of Stati tics; the Office of Experi- 
ment Stations, which publishes the monthly Experimental 
Station Record as well as the Agricultural College Bidletins ; 
the Office of Public Roads and the Weather Bureau, 
which publishes a daily Map, a weekly Bulletin, and a monthly 



Departmental Publications. xxxvii 

Review. Several of the above Bureaus publish separate an- 
nual reports. Numerous reports are issued by the Bureau of 
Statistics in its three sections : (a) the Division of Domestic 
Crop Reports (which publishes the monthly Crop Reporter), 

(b) the Division of Production and Distribution and 

(c) the Editorial Division, which publishes statistics on rural 
economics. These reports take the form of Bulletins (70 to 
1909), Circulars (16 to 1909), and Reprints from the Yearbook. 
The Department also publishes the Proceedings of the Annual 
Meeting of the American Association of Farmers^ Institute 
Workers, and many voluminous Special Reports, some of the 
most important of recent years being The Cotton Plant; Useful 
Fiber Plants of the World; Beet Sugar ; and Co-operative 
Credit Associations Abroad. Among the larger reports in 
progress are those on Farmers'' Co-operative Organizations, 
Tobacco, Wheat in Principal Countries, and Diseases of 
Cattle. In 1908 there were issued under the heads of Reports, 
Bulletins, Circulars, and Separates, 1522 publications in over 
sixteen million copies, about one third of them being Farmers^ 
Bulletins. The Division of Publications publishes a Monthly 
List of Publications, which forms a convenient bibliography of 
the Department issues. Bulletin No. 6 contains a bibliography 
of the Department from 1840 to 1901 ; and Circular No. 4 
(1909) contains a subject index of all Farmers' Bulletins to 
date. 



The Department of the Interior publishes annually the 
Report of the Secretary, containing, in addition to condensed 
reports of the Bureaus, reports on the Territories, the Ter- 
ritorial Possessions, the National Parks and the .Elee- 
mosynary Institutions. The Bureaus which issue separate 
annual reports and other publications are the General Land 
Office (with Decisions in Land Cases), the Indian Office, 
the Bureau of Pensions, the Patent Office (with the 
Patent Office Gazette, Decisions in Patent Cases and Indexes 



xxxviii Suggestions. 

to Patents), the Bureau of Education (with many Separates, 
Circulars and Bulletins, Bulletin No. 385 containing a bibli- 
ography from 1867 to 1907), the Geological Survey (with 
Bulletins, Monographs, Professional Papers and a separate 
volume on the Mineral Resources of the United States) and 
the Reclamation Service (in several volumes). 



The Interstate Commerce Commission (not subordinate 
to any of the nine executive departments) publishes since 1887 
the annual Report of the Commission. A separate volume pre- 
pared by the Bureau of Statistics and Accounts is the annual 
Report of the Statistics of Railways in the United States. The 
cases themselves are published as Decisions of the Interstate 
Commerce Commission of the United States. The Commission 
also issues annually the Proceedings of the Annual Convention 
of the National Association of Railway Commissioners. The 
Commission published in 1903 a monumental work in five 
quarto volumes, entitled Railways in the United States in IQ02; 
a Twenty-two- Year Review of Railway Operations; a Forty- 
Year Review of Changes in Freight Tariffs; a Fifteen-Year 
Review of Federal Railway Regulation; a Twelve- Year Review 
of State Railway Regulation; and a Twelve- Year Review of 
State Railway Taxation. Since 1908 the Commission issues 
Special Reports of which the first was Intercorporate Relations 
of Railways. Reports in preparation are on Switching, Ter- 
minal and Industrial Properties, a proposed Balance Sheet, and 
Steamship Accounting. 



The Post-Office Department publishes the annual Report 
of the Postmaster-General. 

The War Department deals with economic topics through 
the Bureau of Insular Affairs. The chief of the Bureau 
issues his Annual Report (including the Report of the Philippine 



Congressional Documents. xxxix 

Commission in several volumes) and a great variety of other 
documents. The Department also issues the annual Report of 
the Isthmian Canal Commission. 

The Navy Department deals in the annual Report of the 
Secretary with the subject of the Commercial Marine. 

The Smithsonian Institute publishes many annual reports, 
of which the one of chief interest to economists is the Report 
of the Bureau of Ethnology in one or more sumptuous quarto 
volumes. 

The International Bureau of the American Republics 
publishes since 1891 an annual Report of the Director, since 
1893 a monthly Bulletin of the Bureau and a large number of 
Reports, Handbooks, Bibliographical Bulletins, Maps, Law 
Manuals and Special Commercial Bulletins, many of them 
also in Spanish and Portuguese. 

For a clear account of the various branches of the Adminis- 
tration, see Fairlie, J. A. The National Administration of the 
United States of America. (1905.) 



C. Congressional Documents. 

Among the numberless Congressional Documents of recent 
years may be mentioned as of special interest to the students 
of economics: 

Reports of the International Monetary Conferences of i8y8, 1881 
and i8g2 ; of the India Currency Commission, i8g2 ; of the Berlin 
Silver Commission, i8g4. 

Senate (Aldrich) Committee, Report on Wholesale Prices, Wages 
and Transportation. (4 vols., 1893.) 

United States Strike Commission, Report on the Chicago Strike of 
1894. (1895-) 

(Senate) Committee on Education and Labor, Report on the Eight 
Hour Law. (iJ 



xl Suggestions. 

Anthracite Coal Strike Commission, Report on the Anthracite Coal 
Strike of igo2. (1903). 

(Senate) Committee, Report on Labor Disturbances in Colorado, 
i88o-igo4. (1904-) 

(House) Committee on Ways and Means, Tariff Hearings. (2 vols., 
1892.) 

(House) Committee on Ways and Means, Tariff Hearings. (9 vols., 
1908-1909.) 

Joint Select Committee of Congress, Report on Alcohol in the Manu- 
factures and Arts. (1897.) 

(Senate) Merchant Marine Commission, Report. (1905.) 

Commission to Investigate the Postal Service, Report on Railway 
Mail Pay. (2 vols., 1901.) 

(Senate) Committee on Interstate Commerce, Hearings on Regu- 
lation of Railway Rates. (5 vols., 1905.) 

(Senate) Committee, Information on Postal Telegraph and Telephone 
Lines, Postal Savings Banks, Government Life Annuities and 
Provisions for Old Age in Foreign Countries. (1898.) 

Donaldson, T. Report on The Public Domain. (1884.) 

The Immigration Commission, Report on Immigration. (Several 
vols., 1910.) 

Public Lands Commission, Preliminary and Second Reports. (1905.) 

Inland Waterways Commission, Preliminary Report. (1909.) 

Commission on Country Life, Preliminary Report. (1909.) This 
as v^^ell as the two preceding Commissions was created by the 
Executive, not by Congress. 

National Monetary Commission, Reports on Banking and Currency, 
at home and abroad. (Several volumes, 1910-.) 

Far and av^^ay the most valuable report of recent years is 
that of the Industrial Commission appointed by the Senate and 
the House, and published under the simple title of Report of 
the Industrial Commission (19 vols., 1900-1902). The list of 



Congressional Documents. xli 

volumes is as follows: I. Trusts and Industrial Combinalions; 
II. Trust and Corporation Laws; III. Prison Labor; IV. 
Transportation; V. Labor Legislation; VI. Distribution of 
Farm Products; VII. Capital and Labor in Manufactures and 
in General Business; VIII. Chicago Labor Disputes; IX. 
Transportation; X. Agriculture and Agricidtural Labor; XI. 
Agriculture and Taxation; XII. Capital and Labor in the 
Mining Industries; XIII. Trusts and Industrial Combina- 
tions; XIV. Capital and Labor in Manufactures and General 
Business; XV. Immigration and Education; XVI. Foreign 
Labor Legislation; XVII. Labor Organization, Labor Dis- 
putes and Arbitrations ; XVIII. Industrial Combinations in 
Europe; XIX. Final Report. For the wealth of material, 
and the ability with which the results are presented, this huge 
report is unique in the annals of the government publications. 
The final volume gives an admirable survey of the economic 
condition of the United States. 

The American governments are exceedingly liberal in the 
distribution of documents. All local and state reports can 
usually be had for the asking ; but as the supply is limited, it is 
well not to delay. As to the documents of the national gov- 
ernment, the House and Senate publications can be obtained 
by application to one's Representative or Senator; the depart- 
mental publications by application to the respective depart- 
ments. There is now also a Superintendent of Documents, who 
is authorized by law to sell surplus documents in his charge at 
cost of printing from the plates. He publishes a monthly Price 
List of United States Public Documents for Sale. In a few cases, 
however, documents are sold by other parties. Thus the Con- 
gressional Record is sold by the Chief Clerk of the Government 
Printing Oflfice; the Bulletins, Handbooks, etc., of American 
Republics Bureau are sold by the Director of the Bureau ; the 
Official Gazette of the Philippine Government, by the Editor in 
Manila; etc., etc. Several private firms in Washington and 
elsewhere make a business of supplying government documents. 



xlii Suggestions. 



D. Indexes to Government Periodicals. 

PooRE, Ben Perley. A Descriptive Catalog of the United States 
Government Publications, 1/^4-1881. (1885.) — Not entirely 
satisfactory. 

Catalogue of the Public Documents of Congress and all the Depart- 
ments of Government from i8gj-i8g6. (4 vols, to 1901.) 

Tables of, and Annotated Index to, the Congressional Series of United 
States Public Documents, ijth to j2d Congress. (1902.) 

LuNT, E. C. Key to the Publications of the United States Census, 
1 790-1887 (in American Statistical Association Publications, new 
Series, I, 1888). — A carefully classified guide. 

Lane, L. P. Aids in the Use of the United States Government Publi- 
cations (in American Statistical Association Publications, VII, 
1900). 

Scott, G. W., and Beaman, M. C. Index Analysis of the Federal 
Statutes, together with a table of Repeals and Amendments. (2 vols., 
1908.) 

E. British Official Publications. 

In Great Britain the official publications and reports, known 
as Blue Books, are in some respects more voluminous than in 
the United States. The chief periodical report is the decennial 
Census. The Census of igoi appeared in 7 volumes. The 
Census of igii is in preparation. Most of the annual ofiEi- 
cial reports fall under the heads of Finance, Trade and 
Labor. 

Finance. Among these, each in a separate volume or volumes, 
are the Finance Accounts; Financial Estimates; Returns showing 
Revenue and Expenditure; National Debt Account; National Debt 
during Sixty Years; Consolidated Fund Abstract Accounts; Com- 
missioners of Inland Revenue; Income Tax Assessments ; Local 
Taxation Returns, Mint Report, Rateable Property Return; Savings 
Bank Returns, Commissioners of H. M.'s Customs. 



British Documents xliii 

Trade. These reports, issued by the Statistical Department of 
the Board of Trade, include the Statistical Abstracts for the British 
Empire, for the British Colonies and for the United Kingdom ; 
Reports on the Trade of the United Kingdom with Foreign Coun- 
tries and British Possessions; Statistical Tables showing Progress of 
British Trade and Production-; Merchant Shipping Returns ; Canals 
and Navigation Returns; Navigation and Shipping Statements; 
Railway Accidents; Emigration and Immigration. Also monthly 
Trade and Navigation Accounts and a Board of Trade Journal. The 
Statistical Department of the Board of Customs issues annually the 
Report of the Commissioner of Customs, Colonial Import Duties and 
Foreign Import Duties. 

Labor. These reports, issued by the Labor Department of the 
Board of Trade, include Abstract of Labor Statistics ; Abstract of 
Foreign Labor Statistics ; Changes in Wages and Hours of Labor, 
Conciliation {Trade Disputes) Act; Strikes and Lockouts; Trade 
Unions; Directory of Industrial Associations ; Report of Chief 
Inspector of Factories and Workshops; Report of the Chief Registrar 
of Friendly Societies; Co-operative Contracts; Industrial and Provi- 
dent Societies; also a monthly Board of Trade Labor Gazette. 

Other annual reports are: 

Agricultural Returns ; Department of Agriculture and Technical 
Instruction in Ireland; Registrar General; Irish Land Commission; 
Reports on Mines and Quarries; Inspector of Sea and Salmon Fish- 
eries; Geological Survey; Returns relating to Poor Rates and Pauper- 
ism; Railway and Canal Commission ; Street and Road Tramways ; 
Trade and Finance of Foreign Countries; Diplomatic and Consular 
Reports; Postmaster -General. There is also a Statistical Abstract for 
British India. 

Among the recent special Reports of departments and Parlia- 
mentary committees and commissions the most important are: 

Royal Commission on Agriculture (4 vols.. i8g6), and Reports 
of Assistant Commissioners (20 vols., 1896); The Sweating Sys- 
tem (8 vols., 1889); Labor (27 vols., 1894); Local Taxation (9 vols., 
1902) ; India Currency (1893 and 1899) ; Financial Relations between 



xliv Suggestions. 

Great Britain and Ireland (2 vols., 1896); Standard Piece and Time 
Rates (1893 and 1900) ; Agricultural Labourers (1900 and 1901) ; 
Contracts given out by Public Authorities (1897); Wholesale and Re- 
tail Prices (1903); Employment of Women (1894, 1898, 1899); The 
Unemployed (1893 and 1904); Tariff Commission Report (8 vols., 
1904-1910); Eight Hours Day in the Coal Mines (3 vols., 1906); 
Income Tax (1906); Poor Laws (3 vols., 1909); Proceedings of the 
Colonial Conference (1907); Cost of Living (3 vols., 1907-1910). 



The most important reports and papers are summarized and 
criticised in an admirable quarterly review in each number of 
the Economic Review. Messrs. P. S. King & Son, of London, 
publish a convenient Monthly List of Parliamentary Papers 
issued in the preceding month. There is also a General Cata- 
logue of the Principal Parliamentary Reports and Papers pub- 
lished during the Nineteenth Century (1801 to 1900), with 
prices, and in many cases with an analysis of contents. 

For Australasia the best conspectus of the economic situation 
may be found in the annual Official Year Book of Australia 
(second issue, 1909) and the New Zealand Official Year Book 
(eighteenth year, 1909). The separate states also publish 
very good Year Books or annual Statistical Registers. 

For Canada an excellent summary vdll be found in the annual 
Canada Year Book issued by the Census and Statistics Office 
of Agriculture, and covering the entire economic field. 

For other countries a convenient summary is the Jahrhuch 
der Statistik, ed. by Platzer (vol. i, 1909). 



VI. Semi-OfBcial Publications. 



The publications of the American government are supple- 
mented by a great mass of documents, periodicals and reports, 
issued by private and quasi-public associations. Local trade 
statistics are found in the Reports of the Chambers of Commerce 



Semi-Official Publications. xlv 

of the principal cities. In New York City the Chamber of 
Commerce frequently publishes valuable reports on economic 
topics of state and national significance. Almost every im- 
portant branch of business has its own Trade Journal, many of 
which are edited with great ability. 

The Btdletin of the National Association of Wool Manufac- 
turers is published quarterly since 1864 and often contains 
articles of scientific merit. The Annual Reports of the Iron and 
Steel Association also deserve mention. In some cases like the 
Bankers^ Association and the Manufacturers^ Association an- 
nual conventions are held and extended reports issued. The 
publications of the Labor Organizations and Trades Unions 
are voluminous. The National Federation of Labor issues a 
weekly Bulletin and a Report of the Annual Convention. 

The annual reports of some of the great Railway Systems, 
Insurance Companies and Industrial Corporations can generally 
be secured without difficulty, and afford interesting side fights 
on economic development. Associations like the Free Trade 
League; the Asiatic Association; the Irrigation Congress ; the 
Sound Money League; the Farmers^ Alliance; the National 
Child Labor Committee ; the National Live Stock Association; 
the National Good Roads Association; the Patrons of Hus- 
bandry; the National Dairy Association; the Stock Breeders'' 
Association; the Philadelphia Commercial Museum; the Na- 
tional Municipal League; the Association of Life Insurance 
Presidents, and many others of more or less permanence, issue 
fugitive, or periodical reports. Among the most important of 
such semi-official publications are those of the Merchants' As- 
sociation, of the Bureau of Municipal Research, of the Russell 
Sage Foundation, of the National Civic Federation, — all of New 
York. The first has issued a number of volumes, among them 
the remarkable Inquiry into the Conditions relating to the Water 
Supply of the City of New York (1900). The last publishes 
annually several volumes dealing with almost every phase of the 
relation of capital and labor, and treating also the question of 
taxation. It also publishes a monthly National Civic Federa- 
tion Review. Many important questions of social conditions 



xlvi Suggestions. 

and legislation are treated in the annual Proceedings of the 
National Conference of Charities and Corrections. 



VII. Bibliographies and Finding Lists. 

A series of bibliographies, prepared by the chief bibliographer 
of the Library of Congress (A. P. C. Griffin, since 1909 H. H. B. 
Meyer), has been published since 1902 by the national govern- 
ment. The dates and subjects are as follows: Reciprocity, 
(1902) ; Industrial Arbitration, Government Ownership of 
Railroads, Labor, Colonization, 2d ed., (1903) ; Chinese Immi- 
gration, Banks, Budget, The Far East, Federal Control of Com- 
merce, 2d ed., (1904) ; Foreign Railroads, Philippines, (1905) ; 
Child Labor, Municipal Ownership, Negro Question, 2d ed., 
Employers^ Liability, British Tariff Movement, 2d ed., Foreign 
Tariffs, Government Reputation of Insurance, Mercantile Ma- 
rine Subsidies, 3d ed., (1906) ; Federal Control of Commerce, 
Railroads, 2d ed., Immigration, 3d ed.. Income Tax, Iron and 
Steel, Reciprocity with Canada, Trusts, 3d ed., (1907) ; Currency 
and Banking, Deep Waterways, Eight Hour Day, First and 
Second United States Banks, Workingmen's Insurance, Labor, 
2d ed.. Postal Savings Banks, (1908) ; Valuation and Capitaliza- 
tion of Railroads, Sugar, (1909). 



Other good bibliographies on special subjects are: 
Marot, Helen. Handbook of Labor Literature. (1899.) 

Brooks, R. C. Bibliography of Municipal Problems {in Municipal 
Affairs, Vol. ¥,1901). 

The Boston Public Library has published two useful works : 

A List of Books on Social Reform in the Public Library of the City of 
Boston. (1898.) 



Bibliographies. xlvii 

Economics: Selected Works in the English Language (1904.) — 
Compiled by Benj. Rand 

The three most complete bibliographies on socio-economic 
topics are in German: 

Bernstein, Edouard. Bibliographie des Sozialismus und der 
Sozialwissenschaften in each number of Dokumente des Sozial- 
ismus. (1901-1905.) — Annotated and valuable. 

Stammhammer, Josef. Bibliographie des Socialismus und Com- 
munismus. (3 vols., 1893-1909.) 

Stammhammer, Josef. Bibliographie der Social-Politik. (1896.) 

The only general bibliography in English is the short work 
of BowKER, R. R., and Iles, George S., The Readers' Guide 
in Economics, Social and Political Science. (1891.) 

A comprehensive annual bibliography is published by the 
International Institute of Bibliography under the title Bihlio- 
graphia Economica Universalis. It now appears as a quarterly 
appendix to the Revue Economique Internationale. 

The most convenient EngUsh bibliography of current works 
was until recently to be found in The Quarterly Journal of 
Economics. This was discontinued in 1908 and replaced by 
the excellent bibliography in the Economic Bulletin of the 
American Economic Association. The best foreign bibliography 
is the Uebersicht iiber die neuesten Publikationen in Conrad's 
Jahrbucher fur N ationalokonomie und Statistik. A combina- 
tion of bibHography and comment is found in the Kritische 
Blatter fur die gesamten Sozialwissenschaften (monthly, Dres- 
den, 1905-). Edited by H. Beck. The periodical is composed 
of critical reviews by an international staff, each number serving 
as an introduction to a Bibliographie der Sozialwissenschaften 
which since 1906 is published for the International Institute of 
Social Bibliography in Berlin. It is the most complete and ex- 
haustive existing bibliography of economic and social science. 



xlviii Suggestions. 

VIII. List of Books to "which Abbreviated References are 
made in the Bibliographies at the Heads of Chapters. 

Ashley, W. J. An Introduction to English Economic History and 
Theory. (2 vols., London, 1888-1893.) 

Ashley, W. J. Surveys, Historic and Economic. (London, 1900.) 

Bagehot, Walter. Economic Studies. (London, 1880.) 

Bohm-Bawerk, Eugen von. The Positive Theory of Capital. 
(Trans, by Smart, London, 1891.) 

Bowley, Arthur L. Elements of Statistics. (London, 1901, 3d ed., 
1907.) 

Bucher, Carl. Industrial Evolution. (Trans, from the 3d Ger- 
man edition by S. Morley Wickett, New York, 1901.) 

Cairnes, J. E. The Character and Logical Method of Political 
Economy. (London, 1857; 2d ed., 1875.) 

Cairnes, J. E. Some Leading Principles of Political Economy, 
newly Expounded. (London, 1874.) 

Cannan, Edwin. A History of the Theories of Production and 
Distribution in English Political Economy from 1776 to 1848. 
(London, 1893; 2d ed., 1904.) 

Carver, Thomas Nixon. The Distribution of Wealth. (New 
York, 1904.) 

Clark, John Bates. The Distribution of Wealth. (New York, 

1899.) 
Clark, John Bates. Essentials of Economic Theory. (New York, 

1907.) 

CossA, LuiGi. An Introduction to the Study of Political Economy. 
(Trans, by Louis Dyer, London, 1893.) 

Cunningham, W. An Essay on Western Civilization in its Economic 
Aspects. Ancient Times. (London, 1898.) Mediceval and Modern 
Times. (London, 1900.) 

Cunningham, W. The Growth of English Industry and Commerce. 
Early and Middle Ages. (4th ed., London, 1905.) Modern Times. 
(4th ed., 2 vols., London, 1907.) 



Select Books xlix 

Davenport, Herbert Joseph. Value and Distribution. (Chicago, 
1907.) 

Dewey, Davis R. Financial History of the United States. (Am. 
Citizen Series, New York, 3d ed., 1905.) 

Ely, Richard T. Studies in the Evolution of Industrial Society. 
(New York, 1903.) 

Fetter, Frank A. The Principles of Economics. (New York, 
1904.) 

Fisher, Irving. Mathematical Investigations in the Theory of 
Value and Prices. (New Haven, 1892.) 

Fisher, Irving. The Nature of Capital and Income. (New York, 
1906.) 

Fisher, Ir\t:ng. The Rate of Interest. (New York, 1907.) 

Flux, A. W. Economic Principles, an Introductory Study. (Lon- 
don, 1904.) 

Giffen, Robert. Economic Inquiries and Studies. (2 vols., 
London, 1904.) 

Hadley, Arthur Twining. Economics. An Account of the Re- 
lations between Private Property and Public Welfare. (New 
York, 1896.) 

Hadley, Arthur Twining. The Relations between Freedom and 
Responsibility in the Evolution of Democratic Government. (New 
York, 1903.) 

Hearn, William Edward. Plutology; or The Theory of the Efforts 
to Satisfy Human Wants. (London, 1864.) 

Hobson, John A. The Economics of Distribution. (New York, 
1900.) 

Hobson, John A. The Evolution of Modern Capitalism. (Lon- 
don, 1894, 2d ed., 1907.) 

Jenks, Edward A. A History of Politics. (London, 1900.) 

Jevons, W. Stanley. Investigations in Currency and Finance. 
(London, 1884.) 

Jevons, W. Stanley. Methods of Social Reform. (London, 
1883.) 

d 



1 Suggestions. 

Jevons, W. Stanley. Money and the Mechanism of Exchange. 
(London, 1879.) 

Jevons, W. Stanley. The Principles of Economics. (London, 

1905-) 
Jevons, W. Stanley. The Theory of Political Economy. (London, 

1871; 3d ed., 1888.) 

Johnson, Alvin S. Rent in Modern Economic Theory. In Ameri- 
can Economic Association Publications. (3d Series, Vol. Ill, 
New York, 1902.) 

Keynes, J. The Scope and Method of Political Economy. (London, 
1891; 3d ed., 1904.) 

Maine, Henry Sumner. Ancient Law. (London, 1861 ; 8th ed., 
1880.) 

Maine, Henry Sumner. Lectures on the Early History of Insti- 
tutions. (London, 1875; 3d ed., 1880.) 

Maine, Henry Sumner. Village Communities in the East and 
West. (London, 1871; 4th ed., 1881.) 

Marshall, Alfred. Principles of Economics. (Vol. I, London, 
1890; 5th ed., 1907.) 

Mayo-Smith, Richmond. Science of Statistics, part i. Statistics 
and Sociology. (New York, 1895.) 

Mayo-Smith, Richmond. Science of Statistics, part 2. Statistics 
and Economics. (New York, 1899.) 

Meade, E. S. Trust Finance. (New York, 1903.) 

Mill, John Stuart. Principles of Political Economy, with some 
of their Applications to Social Philosophy. (2 vols., London, 1848; 
5th ed., 1880.) 

Nicholson, J. Shield. Principles of Political Economy. (3 vols., 
London, 1893-1901.) 

Nicholson, J. Shield. The Effects of Machinery on Wages. (New 
ed., London, 1892.) 

Nicholson, J. Shield. Strikes and Social Problems. (London, 
1896.) 



Select Books. li 

Pantaleoni, Matfeo. Pure Economics. .(Trans, by Bruce, Lon- 
don, 1898.) 

Patten, Simon N. The Consumption of Wealth. (Philadelphia, 
1889.) 

Patten, Simon N. The Development of English Thought; A 
Study in the Economic Interpretation of History. (New York, 
1899.) 

Patten, Simon N. The Theory of Dynamic Economics. (Phila- 
delphia, 1892.) 

Payne, E. J. History of the New World called America. (2 vols., 
London, 1892-1899.) 

PiERSON, N. G. Principles of Economics. (Trans, by A. A. Wotzel. 
Vol. I, London, 1902.) 

RiCARDO, David. Principles of Political Economy and Taxation. 
(London, 181 7.) 

Ross, Edward A. Foundations of Sociology. (New York, 1905.) 

Seager, Henry Rogers. Introduction to Economics. (New York, 
1904; 3d ed., 1906.) 

Seager, Henry Rogers. Economics: Briefer Course. (New York, 
1909.) 

Seligman, Edwin R. A. The Economic Interpretation of History. 
(New York, 1902; 2d ed., 1907.) 

Seligman, Edwin R. A. Essays in Taxation. (New York, 1895 ; 
6th ed., 1910.) 

Seligman, Edwin R. A. The Shifting and Incidence of Taxation. 
(New York, 1892; 3d ed., 1909.) 

SiDGWiCK, Henry. The Principles of Political Economy. (Lon- 
don, 1883.) 

Smart, William. The Distribution of Income. (London, 1899.) 

Smart, William. An Introduction to the Theory of Value. (Lon- 
don, 1891.) 

Smart, William. Studies in Economics. (London, 1895.) 



Hi Suggestions. 

Smith, Adam. An Inquiry into the, Nature and Causes of the Wealth 
of Nations. (2 vols., London, 1776. Best edition by Edwin 
Cannan, 1904.) 

Veblen, Thorsten. The Theory of Business Enterprise. (New 
York, 1904.) 

Walker, Francis A. Political Economy, Advanced Course. (New 
York, 1883; 3ded., 1888.) 

Walker, Francis A. The Wages Question; A Treatise on Wages 
and the Wages Class. (New York, 1876.) 

Walsh, Correa Moylan. The Measurement of General Exchange 
Value. (London, 1901.) 

Webb, Sidney and Beatrice. The History of Trade Unionism. 
(London, 1894.) 

Webb, Sidney and Beatrice. Industrial Democracy. (2 vols., 
London, 1894; 2d ed., in i vol., 1904.) 

Webb, Sidney and Beatrice. Problems of Modern Industry. 
(London, 1898.) 

Weber, Adna F. The Growth of Cities in the Nineteenth Cen- 
tury — A Study in Statistics, in Columbia Studies in History, 
Economics and Public Law. (Vol. XI, New York, 1899.) 

WiESER, Friedrich VON. Natural Value. (Edited by W. Smart; 
trans, by C. Malloch, London, 1893.) 

Wright, Carroll D. Outline of Practical Sociology. (Ameri- 
can Citizen Series, 7th ed.. New York, 1908.) 



Principles of Economics. 



Principles of Economics. 



Part I. 

Introduction. 

CHAPTER I. 

FUNDAMENTAL CONCEPTS. 

1. References. 

A. Maisliall, Principles of Economics ( 1907), bk. ii ; J ];. Clark, Dntribii- 
tion oj Wealth (1S99), ch. ix, and Essentials 0/ Economic '1 heory {1907), ch. i ; 
W. E. Hearn, Plutology (1864), ch. i; W. Smart, Distribution of Income 
(1899), bk. i ; A. T. Hadley, Economics (1896), ch. i ; F. A. Fetter, Prin- 
ciples of Econojtiics (1904), chs. ii, iii ; J. S. Nicholson, Principles of Politi- 
cal Economy (1903), Introd. ; H. Sidgvvick, Principles of Political Economy 
(1883), bk. i, ch. iii ; F. A. Walker, Political Economy (3d ed., 1888), part i ; 
A. W. Flux, Economic Principles (1904), ch. i ; E. Cannan, History of the 
Theories of Production Tind Distribution (2d ed., 1904), ch. i; H. R. Sea- 
ger, Introductioti to Economics (1904), ch. iii ; M. Pantaleoni, Pure Econo- 
mics (1898), part I, ch. v; W. S. Jevons, Principles of Economics (1905), 
chs. iii, iv, viii ; C. A. Tuttle, The Fundamental Ecotiomic Principle (Quart. 
Jour. Econ., XV, 1901); I. Fisher, Capital and Income (1906). 

2. Economic Life. 

The starting-point of all human activity is the existence of 
wants. To satisfy hunger and thirst, to secure shelter and to 
provide clothing were the chief aims of primitive man, and 
constitute even to-day the motor forces of all society. As man 
develops, his wants grow in number and refinement. However 
civilized he becomes, his material welfare forms the basis on 
which the whole larger life is erected. To secure the means of 
satisfying wants brings into play the economic activity of man. 
The i)rocess may be expressed in the words — wants, efforts, 



4 Fundamental Concepts. [§ 2 

satisfactions. We start out with the existence of wants, we 
desire to secure their satisfaction, we can ordinarily accomplish 
this only through some effort. The economic life of man is 
concerned with such efforts and their results. 

The sum of all one's possessions, including at the time 
slaves, wife and children, was termed by the Greeks ecos 
(ot/cos) ; and the method of managing them was called eco- 
nomics (01/C01/0/XIK17) — the control or rule (i/o/x,os) of the house- 
hold (oiKos). We still speak of the economical man as the 
one who orders the affairs of his household, who manages his 
possessions, with prudence and success. In the wider sense, 
whether he achieves success or not, the economic activity of 
man looks to a provision of the material means to satisfy his 
wants and those of his household. The science which deals 
with these economic activities is called economics or political 
economy. 

Business means etymologically the state of being busy. The 
fundamental thing about which all men must ordinarily busy 
themselves is the satisfaction of their wants. To attain first 
a competence and then a surplus, to provide for one's liveli- 
hood and then to secure a profit, is the essence of business 
activity. Economics might therefore equally well be defined 
as the science of business activities. 

The motive that guides men in their economic life is some- 
times described as the economic motive. It may best be 
defined as the motive which impels every human being to 
satisfy his wants with the smallest possible elfort, or which 
leads him to secure the most pleasure with the least pain. The 
existence of such a motive is undeniable ; it is in fact of deep 
and abiding importance ; it may even be declared the para- 
mount consideration in the working out of economic law. 
We must, however, not forget that this is not the only influence 
at work in economic life. Human beings are impelled by 
other motives as well ; and these other motives may often exert 
a perceptible influence in economic life. The study of eco- 
nomic history shows us that religious, political and ethical 



§ 2] Economic Life. 5 

considerations have profoundly modified economic action itself. 
In the economic life of a primitive Christian community the 
economic motive was of very different importance from that of 
modern industrial life. Even in modern times the economic 
motive is not equally strong everywhere, or equally free from 
the admixture of other influences. The Indian ryot is not 
like the American farmer in his desire to " get ahead." The 
negro laborer in the South is not so amenable to the economic 
motive as the stock exchange broker. The salary of a govern- 
ment employee who hopes for ofificial decorations cannot be 
explained in the same way as the wages of a carpenter. An 
analysis of all the motives that influence men in their economic 
life belongs to social psychology, and would disclose widely 
varying effects at different times and places, as well as in 
different individuals or classes at the same time or place. In 
searching for the fundamental laws of economics it is conven- 
ient to exclude all motives save the economic, since the latter 
is the one of basic significance, and since it would otherwise be 
impossible to formulate economic theory in general terms. In 
applying the law to actual life, however, we must be careful to 
study how its operation is modified by the other — even though 
minor — motives which affect economic action. 

If the " economic motive " is thus open to misconception 
as explaining the whole economic life, the so-called " eco- 
nomic man " is a complete abstraction. By the " economic 
man " is meant the human being dominated by the economic 
motive. Such a man, however, does not really exist. Not 
only do other motives affect the economic life, but side by side 
with the economic life itself are the aesthetic life, the religious 
life, the intellectual life and the multiplicity of other human 
activities. It is indeed the function of economics to study 
that aspect of human activity known as the economic life. 
We must, however, not forget that we are studying man in only 
one phase of his existence. Although there is both an eco- 
nomic and a religious life, there is no economic man, just as 
there is no separable religious man. The business man has his 



6 Fundamental Concepts. [§ 3 

family, just as the clergyman has an appetite. The conclusions 
of economic science, therefore, are provisional, not final, con- 
clusions with reference to the conduct of life in general. 

3. Economics or Political Economy? 

Civilized man cannot be thought of apart from society. In 
fact human beings, whether civilized or not, have from the 
outset lived in some form of social union. Robinson Crusoe is 
not a type, but an anomaly. Without society man could never 
have developed. There would be no such thing as speech, 
morals, law or order. Economic life deals with man as exist- 
ing in society. Economics is hence a social science. 

Economics, however, is not the whole of social science. 
There are as many divisions of social science as there are 
important classes of social relations. Jurisprudence deals with 
the legal relations of society, with certain usages and customs 
which have received the sanction of precedent and have been 
crystallized into law. Ethics, or the science of morals, deals 
with another important group of social relations, for individual 
standards of conduct can be understood only in their relation 
to social ethics. Politics treats of the social relations of man 
looked upon as a member of organized society or the state ; 
it discusses the connection between the individual and the 
government. Sociology, or the fundamental social science, 
deals with society as a whole, and studies certain general prin- 
ciples that lie at the basis of each of the separate social sciences. 
Economics is one of these separate social sciences. The ethi- 
cal, the legal, the political and the economic relations of men 
are all outgrowths of social life ; and what is common to them 
all falls within the province of sociology. 

Why, then, do we speak of political economy ? It may be 
frankly confessed that the term is inexact. In one sense 
politics, as we have seen, is simply a branch of social science. 
Politics deals with the state ; but the state is organized society. 
It is composed of individuals and cannot be conceived as 
apart from individuals. Yet when we use the term political 



§ 3j Proper Term. 7 

science, stress is ordinarily laid on the state ; when we speak 
of social science, the emphasis is put on individuals as mem- 
bers of society. It so happens that when the term political 
economy was first used by the Greeks, they thought only of 
the former meaning. Aristotle, after discussing domestic 
economy, tells us that states also, like individuals, must make 
both ends meet. There is, he says, a regal economy, or the 
art of managing the public household in monarchies ; there is 
a provincial economy, best suited to provinces ; and finally 
there is a political economy, best suited to the " polls," or free 
state. Political economy therefore is to him substantially the 
art of providing a revenue for the state. When the subject 
was again discussed at the close of the middle ages, it was 
seen that the revenue of the state depends upon the revenue 
of the people, and political economy was now conceived of 
as the art of making a people wealthy and powerful through 
national development. It was soon recognized, however, that 
national progress depends chiefly upon the efforts of the indi- 
viduals themselves. Thus in more recent times the stress 
has come to be laid on the causes which condition the eco- 
nomic advance of the various classes of society, and since the 
emphasis is now put on the social rather than on the political 
causes, the science which deals with these problems is properly 
called social economics or, more briefly, economics. 

The world, however, is conservative ; and the old term 
political economy, which arose in former centuries when 
attention was centred on the political side, is still often used. 
Strictly speaking, we ought to employ the term political econ- 
omy only when we treat of the political aspect of economic 
relations, that is, of their direct dependence upon government 
action. People forget that economic activity is primarily 
social, and only in part influenced by political considerations. 
The force of habit makes them say political economy when 
they really mean social economics or economics proper. 

The foregoing explains the reason for dropping the first 
half of the old term, political economy. The change in the 



8 Fundamental Concepts. [§ 4 

second half is due to another cause, — the recognition of the 
scientific character of the study. Many modern sciences end 
with the suffix *•' ics," as physics, politics or mathematics. 
When the writers of the seventeenth and eighteenth centuries 
first adopted the Greek phrase, they had in mind the endeavor 
to augment the wealth or " economy " of the state. Hence the 
term. The transition from the point of view of an art to that 
of a science has substituted for the old phrase the newer name 
— economics, that is, the science that deals with the economy 
of society and of the individuals of which it is composed. 

4. The Meaning of Wealth. 

It is evident from what has been said that economic activity 
is concerned with wealth. In fact economics is often called 
the science of wealth. But what is wealth ? 

To the ordinary man wealth is equivalent to money. When 
we look a little deeper, however, we see that what he means 
is not money, but money's worth. A man's wealth nowa- 
days consists of anything which can be obtained, or sold, for 
money. But this is only a secondary meaning. Money is an 
institution of comparatively recent date ; there was wealth 
before there was money. Nor will it suffice to say that wealth 
is that for which something else can be procured through ex- 
change. For although there were exchanges in the shape of 
barter before there was any money, wealth existed even before 
men exchanged their possessions. The fundamental idea is 
something deeper. There are really three characteristics. 

(i) Originally wealth, as the word implies, denoted weal or 
well-being. Whatever a man had in abundance constituted his 
wealth, because it afforded him a surplus. It made him well 
off. The capacity of anything to satisfy a human desire is 
called its utility. When we speak of the utility of a thing, 
however, we do not pass any judgment upon its moral qualities. 
Whisky and opium may be injurious, yet so far as they satisfy 
existing wants they possess utility. They are called goods 
because they are good for the satisfaction of some want, no 



§ 4] Meaning of Wealth. 9 

matter how reprehensible that want may be. In order for 
anything to constitute wealth, the first requisite is that it should 
possess utility, that is, the capacity to satisfy some desire. 
This, however, does not suffice. Not all desirable things con- 
stitute wealth. The conception must be further limited. 

(2) The second characteristic of wealth is that it must be 
something external to man. Personal or internal goods are a 
contradiction in terms. What is meant is personal or internal 
qualities which are bound up with the individual himself, like 
his physical, mental or moral characteristics. Health is not 
wealth, although it may be the basis of wealth. Man cannot 
part with these qualities ; he can only embody them in some 
product which will be serviceable to others. His personal 
qualities may thus enable him to acquire wealth, but they do 
not themselves constitute wealth. To speak of personal wealth 
in any but a metaphorical sense, as a wealth of humor or good 
spirits, is to confuse the fundamental distinction between man 
and his environment. Wealth exists for man, but man himself 
is not wealth (unless indeed he is a slave, and then he is wealth, 
not to himself, but to some one else) . Wealth may be produced 
by man, but it is the product, not the producer, that constitutes 
wealth. The things that form wealth are always outside of 
man ; they are external, not internal, phenomena. 

This does not mean that wealth is necessarily something tan- 
gible. It is indeed true that the term " goods " is sometimes 
preferred to " commodities," because the latter is supposed 
to imply something tangible. "Commodity," however, really 
means that which " accommodates " or is " commodious " to us, 
just as goods are those things that are " good for us," — both 
in the economic sense. If, however, we use " commodity " to 
designate some tangible, visible object, wealth is not confined 
to commodities. Utilities may be conferred not only by in- 
animate objects but by human services. A concert satisfies a 
want ; what we pay for is not a physical object but a service. 
A teacher receives a salary ; what he gives in return is some- 
thing intangible. Services in almost every case bring about 



lo Fundamental Concepts. [§ 4 

some change in man's environment, and in that sense even a 
service may be classed as something material. But if by ma- 
terial we mean something that has an objective, visible exist- 
ence, a service must be considered immaterial. It confers 
utilities, it is external to man, it is to that extent wealth ; but it 
is not physical, visible, tangible wealth. Yet the higher the 
civilization, the more numerous will be these forms of impal- 
pable wealth. 

In reality, however, the distinction between commodities 
and services is slighter than would appear at first blush. For 
in each case we are really dealing with services. The sole use 
of a commodity is the series of services which it can render. 
Whether the music which we hear comes from a music-box or 
from a human voice, whether the boat is propelled by a man 
or an engine, is of no consequence. What we enjoy in each 
case is a service. The only difference is that a service dis- 
appears in the rendering, while a commodity often remains, 
and is capable of similar services in future. The service is 
evanescent, the commodity is often durable. The commodity 
may then be regarded as the embodiment of a series of stored 
up services, to be conferred piecemeal. But the distinction is 
vague. For many commodities, like coal, ice-cream and the 
like, disappear in the very act of rendering a service. Dura- 
bility is no criterion of wealth. An ephemeral service may be 
of far greater importance than a durable commodity. It is the 
character, not the length or repetition, of the service which we 
prize. The real relation between a concrete commodity and 
a service is that the commodity is a crystallized service or a 
series of services. The essence of wealth is an inflow of sat- 
isfactions : utilities consist of services, whether or not they 
are embodied in physical objects. The very idea of a ser- 
vice, however, implies something that flows in to one from 
the outside, whether the outside be a man or an object. 
Wealth is always something external. 

(3) The third characteristic of wealth is limitation of supply. 
A few goods and services exist in such plenty that" the satisfac- 



§ 4] Meaning of Wealth. 1 1 

tion of our wants is not affected by any consideration of the 
quantity available. The deprivation of any unit in the supply 
will make no difference to us. We all need air, for instance, but 
in ordinary circumstances air is free to all, in unlimited quan- 
tities. Such goods are therefore called free goods. The vast 
majority of commodities, however, are not the free gift of na- 
ture. They exist in such limited amounts that we attach im- 
portance to definite quantities. If we wisli to utilize them, we 
must be economical. Hence they are called economic goods 
and form the subject matter of the science of economics. 

Putting it in another way, it may be said that while all 
goods that render a service possess a certain kind of utility, 
only economic goods, or goods limited in supply, possess 
that grade of utility which results in value. As we shall see 
later, value is an estimate of the relative importance or utility 
of definite quantities of goods. When we speak of the value 
of a diamond, the word conveys no precise meaning unless 
we know how large and pure the diamond is. When we say 
a thing is useful, we do not measure its grade of utility ; but 
when we say a thing is valuable or worth something, we at 
once ask : how much ? In the case of free goods, by which we 
mean goods the amount of which is unlimited, we attach no 
importance to any particular quantity, that is, we set no value 
on it. Wealth might therefore be defined as composed of things 
that possess value, and economics would then be the science 
of value. 

In what has preceded we have virtually affirmed that wealth 
means abundance, and at the same time connotes limitation 
of supply. This seems absurd. The apparent absurdity, how- 
ever, is removed by the statement that wealth consists of an 
abundance of things limited in supply. If the supply is lim- 
ited, man will make .an effort to secure them ; the more scarce 
they are, the more valuable they will be and the more effort 
he will make. Economic action consists in getting the great- 
est results with the least effort. Anything which will afford us 
the same services with less effort will set free surplus energy for 



1 2 Fundamental Concepts. [§ 4 

other purposes, and thus increase our wealth. The irrigation 
tracts in the West represent much effort and much wealth; 
if water were to become as plentiful there as in the East, the 
wealth of the country would be increased, because all the 
efforts devoted to securing water would now be devoted to 
something else, let us say to building railways. The water 
would no longer be wealth, just as the air is not wealth, but 
there would be more wealth than before because there would 
be a larger total inflow of satisfactions. Before, we had only 
the water ; now we have the water and the railroads. 

This also explains the seeming opposition between wealth 
and value. Wealth is composed of things having value, and 
yet the more we have of anything, the less its value. This 
statement overlooks the fact that, as we shall see later ( § 76 ), 
value is an expression of the relative importance of goods, 
while wealth denotes an aggregate of goods possessing value. 
In the example above, the value of water indeed disappeared, 
but was replaced by that of railroads, previously not existing. 
The reduced value of a commodity whose quantity increases 
may be compensated by the new value of something which 
did not exist before ; but the aggregate of wealth may be 
augmented. Thus increasing wealth does not mean decreasing 
value in general, for the lower value of some things is balanced 
by the higher value of new things. An increase of commodities 
can never of itself engender a decrease of wealth. 

To recapitulate, in order to constitute wealth, a commodity 
or service must have three qualities. First, it must possess 
utility : if the thing is of no use, it is not a good at all. 
Secondly, it must be external to the individual : a man may 
be skilful or intelligent, but he is not wealthy until he has 
transmuted his skill into some actual result. Thirdly, it must 
be limited in amount : if it is free to all, it may make him 
happy, but its possession will not differentiate him from his 
neighbor, and he will attach no specific value to it. 

Since modern society is based on the interchange of posses- 
sions, all this can be summed up in the statement that wealth 



f 5] Wealth and Man. 1 3 

IS nowadays anything that can be exchanged. If it is not 
useful, no one will want it ; if it is not external, no one can 
part with it ; if it is not limited in quantity, no one will give any- 
thing for it. Historically and fundamentally, however, wealth 
is anterior to exchange. Things do not possess value because 
they are exchanged ; they are exchanged because they possess 

value. 

5. "Wealth cind Man. 

Wealth, then, forms the subject matter of economics. But 
in what sense ? 

If a man chops down a tree for firewood, he is adding to 
his wealth. Yet a discussion of the best axe to be used would 
not be an economic discussion. We all need light ; yet a study 
of the relative merits of gas and electricity would not necessa- 
rily be economic in character. We may study wealth from 
the technical as well as from the economic point of view. 
The technical study explains the qualities of the thing itself or 
in relation to other things : economics deals with these qualities 
only in their relations to man. A study of the relative merits 
of axes would be technical ; a study of the income derived 
from tree-felling is economic. Economics is therefore the 
science of man in his business relations to wealth. The 
emphasis is to be put on the human rather than on the mate- 
rial side of the problem. Since wealth in its economic aspects 
consists of anything that has commercial value, economics 
may also be defined as the science of value, in the sense of 
the science of human relations so far as they are affected by 
value. 

Wealth is at bottom a surplus of satisfactions. We may 
therefore approach the subject from either side, — that of satis- 
faction or of want. In other words, in dealing with the goods 
that constitute wealth we must be mindful not only of their 
acquisition, but also of their use ; not only of their production, 
but also of their consumption. In order to grasp the real 
meaning of wealth, we must ask not only, what have you got? 
but, what do you do with it? 



14 Fundamental Concepts. [§ 5 

If a savage were to find a watch on the seashore, he might 
prize it as a trinket. As a watch it would be of no use to him. 
For watches to have any material value presupposes a society 
considerably advanced in intelligence. The same commodities 
may be relatively valueless to one generation and exceedingly 
valuable to another. At bottom it is demand which sets in 
motion those forces which result in giving a thing value. The 
social demand for a thing is due to the uses to which it can be 
put. But the uses to which it can be put depend not only on 
the thing to be used but on the individuals who use it. Wealth 
therefore depends in the last instance on man. 

Wealth can be increased only through the multiplication and 
better utilization of commodities. The more and better the 
commodities, the wealthier the population as a whole. This 
multiplication can take place only in obedience to an increased 
V demand. Increased demand, however, means a diversification 
of wants. People now want more things of different kinds than 
in the earlier stages of society. The things they want, however, 
depend in last resort upon their aesthetic, intellectual and moral 
conditions. The physical appetite of civilized man differs from 
that of the savage only in its being more refined, — that is, 
more aesthetic. It differs not in quantity, but in quality. His 
other appetites also change with the development of civiliza- 
tion. The economic life is therefore ultimately bound up with 
the whole moral and social life. There is a deeper meaning in 
Ruskin's statements : "There is no wealth but life," and "Nor 
can any noble thing be wealth except to a noble person." The 
economist in studying wealth must continually bear in mind 
those forces which make civilized human beings ; for, after all, 
it is not the wealth itself, but the human beings who create 
and who use the wealth, that are of fundamental importance. 
What a man does with his wealth is a vital question ; for upon 
the answer given to this question by society as a whole depends 
the growth of future wealth itself. 

This is equivalent to saying that civilization consists in the 
attempt to multiply wealth, and to render man more amenable 



§6] Measure of Wealth. 15 

to those higher forces which will lead him to employ his wealth 
in the true interests of progress. The goal of all economic 
development is to make wealth abundant and to make man 
more able to use wealth correctly. The real object of eco- 
nomics is to explain the process of making wealth cheap, and 
man dear. Education, science, art, ethics, — all have an eco- 
nomic side. 

6. The Measure of "Wealth — Income and Capital. 

Americans speak of a man as worth a million dollars; 
Englishmen would call an equally wealthy man at home worth 
ten thousand pounds a year. In the United States, land is y 
assessed for taxation at what it will sell for ; in England, at 
what it will rent for. In the one case we estimate wealth by 
the capital value of property, in the other by the income value. 
Capital and income are thus here two phases of the same thing. 
Historically the reason is simple. In the middle ages land 
was the chief form of wealth, but was rarely bought or sold. 
Under the feudal system land had no selling value, but only a 
rental or income value. A man was rich when he had a large 
rent roll. The custom of measuring wealth by periodical 
income finally spread to all classes of society, because of the 
predominant influence of the landed interest. In the American . 
colonies, on the other hand, land was abundant and free from 
feudal restrictions ; it was, therefore, almost from the begin- 
ning bought and sold like other commodities which exchanged 
hands for definite sums. Thus the selling or capital value 
came to be the measure of wealth in general. Income and 
capital are therefore two a[spects of wealth. In the one case 
we measure wealth as a flow of services or stream of satisfac- 
tions ; in the other case as a stock of services or fund of 
satisfactions. 

The income measurement of wealth is the more fundamental 
psychologically as well as historically. We desire things at 
bottom because of their utility. They can impart this utility 
only in the shape of a succession of pleasurable sensations. 



y 



1 6 Fundamental Concepts. [§ 6 

These sensations are our true income. Income, in the eco- 
nomic sense, is the inflow of satisfactions from economic goods. 
When water is free to all, the pleasure of drinking it does not 
constitute an income, just as little as basking in the sun, which 
shines on rich and poor alike, is income. When water, how- 
ever, becomes so scarce that it acquires a value, its use affords 
in the broadest sense an income. 

The original conception of income is therefore pleasure or 
benefit income. In modern times value has come to be esti- 
mated in terms of money, and income is accordingly used in 
general to denote the inflow or revenue in money, — the money 
income as opposed to the pleasure or benefit income. If I 
rent my yacht to another, the return is called income, because 
the benefit comes in in the shape of money ; if I use the yacht 
myself, the return in the form of satisfaction is not ordinarily 
called income. Yet they are essentially analogous phenomena ; 
for no one would pay a sum of money for anything unless it 
afforded him an equivalent amount of satisfaction. Just as 
concrete articles of wealth existed before there was any ex- 
change, so income existed before there was any money. Amid 
a society based on money transactions, however, income de- 
notes any inflow of satisfactions which can be parted with for 
money. It may not be money income, but it must be capable 
of being transmuted into money income. 

As against the income, which is at bottom the service or 
satisfaction afforded by anything that has value, is to be put 
capital. When we buy anything we buy the right of securing 
such a satisfaction or stream of satisfactions, either from 
repeated services as such, or from the commodity which 
embodies such services. Every commodity is a store of 
such satisfactions. A suit furnishes a satisfaction or income 
every time it is worn, an axe affords an income every time it 
is used. We may therefore either pay for each service as it is 
rendered or give a lump sum, which capitalizes this anticipated 
income or flow of satisfactions. One may rent the dress-suit 
every night or buy it outright. The process of valuation 



§ 6] Income and Capital. 17 

through which we assign a capital value to this complex of 
future income values and through which we transmute the flow 
of satisfactions into a fund is a subtle one, to be discussed later. 
The process is taking place about us every moment. Nothing 
would have any capital value if it had no income value ; capi- 
tal is capitalized income. 

This view of capital has not always been recognized. The 
earliest use, indeed, of the word capitale at the close of the 
middle ages was to designate the caput, or principal sum of 
money from which a revenue was expected. Yet it has become 
customary among economists since Adam Smith not only to 
confine the term capital to wealth used for further production, 
in contradistinction to wealth devoted to immediate consump- 
tion, but also to differentiate capital from land. Capital 
would then be defined as that part of wealth which is the 
result of production devoted to further production. The 
consequence has been that capital has often been regarded as 
consisting chiefly of the tools, machinery, factories, ships, cars 
and finished products of all kinds used to increase production. 

This is, however, at variance with business usage. When a 
wagon builder, for instance, counts his capital, he always 
includes his real estate. The factory may indeed diff"er in such 
important points from the land on which it is built as to 
justify the erection of a separate category for land, but in one 
sense they are both classes of capital. Again, he includes in 
his capital the stock of finished goods, irrespective of whether 
the wagons are to be used by farmers as tools to garner the 
crops or by millionaires for pleasure. Finally, he includes 
things that have not been produced at all, for instance, mere 
privileges or patent rights granted to him by government. His 
capital thus comprises things that have never been produced, 
as well as things that may never be used for further production. 
Capital in this sense is simply wealth which yields or can 
yield an income. It includes everything that has a capital 
value. The wagon is capital to the livery-stable keeper because 
his business income is derived from renting its use day by day 



1 8 Fundamental Concepts. [§ 6 

to customers ; the wagon is capital to the farmer because it 
helps him to get an income from the crop ; the wagon is 
capital to the millionaire because it embodies a series of 
incomes, which he actually enjoys in kind by riding, or which 
he could enjoy in money if he chose to let it out piecemeal or 
to sell it outright. If a broker fails, his creditors will insist on 
including in the assets or capital not only his stock exchange 
seat, which is not the result of any production, but his real 
estate holdings as well. Both have a capital value. Capital 
as contrasted with income, therefore, is all wealth regarded as 
a store or fund. 

In every progressive society men seek to enlarge their flow 
of satisfactions. This can normally be done not only by 
enhancing personal efficiency, but primarily by increasing or 
improving the items of wealth which embody this flow of 
income. Economic progress thus normally rests upon the 
devotion of existing wealth to the further increase of wealth ; 
and the chief function of capital may accordingly without 
great error be declared to be its productive use. But it mu.c 
not be overlooked that the end of production is consumption 
and that at bottom capital is capitalized income. 

While income is, therefore, the fundamental test of wealth, 
it ordinarily makes no difference whether we measure a man's 
wealth by his income or his capital. Sometimes, however, a 
difficulty arises. A railway president or trust manager with a 
salary of fifty thousand dollars a year cannot well be called 
poor. Yet a system of taxation based on the measurement of 
wealth by capital, as in the case of the property tax, would 
exempt him completely. The capital estimate of wealth is 
here clearly inadequate. On the other hand, the customary 
restriction of income to money income is also occasionally 
embarrassing. When capital is so used as not to yield a 
money income, as in the case of one's yacht or jewels or 
private park, an income tax would not reach the owner at all. 
The injustice would be no less than in the preceding case. 
Some modern tax laws indeed include in taxable income the 



§7] Wealth, Money and Property. 19 

annual value of a house inhabited by the owner. But the 
inclusion of benefit income in the case of a house and its 
exclusion in the case of a yacht or park are not easy to justify. 
The really safe measure of wealth, applicable in all cases, is 
income in the sense of pleasure or benefit income. 

7. Wealth, Money and Property. 

Whether wealth be measured in terms of capital or of in- 
come, it is generally expressed in terms of money. For wealth 
in modern society is anything that can be exchanged, or that 
possesses an exchange value, and money is admittedly the 
universal medium of exchange. Hence wealth is sometimes 
identified with money. 

It is clear, however, that money is simply a commodity, and 
forms only a part of the entire stock of wealth. It is, indeed, 
a most important constituent of wealth, but acquires this im- 
portance chiefly because it is a representative of other wealth. 
Very little of a man's wealth consists of money, although it 
can all be converted into mon^y. Money is significant not 
for itself but as the universal purchasing medium. In rnodern 
society the money needed to carry on the daily business trans- 
actions is like the lubricating oil in a machine. Without the 
oil there would be difficulty in making the machine work ; 
without the money there would be embarrassment in conducting 
business. But just as too much oil would be not only useless 
but harmful, so the existence in a country of more money than 
is needed for the actual transactions would represent a waste 
of wealth which might otherwise be employed in production. 
Ivloney is wealth, but wealth is not money. Wealth is money's 
worth, but wealth and money are by no means identical. 

Finally, we sometimes confuse wealth with property. In 
reality they are not convertible terms. Property is primarily 
a legal conception. It denotes the exclusive right of owner- 
ship in a definite amount of wealth. A man's property is what 
is legally his own, whether his own consists of capital or of 
income, of concrete goods or of mere rights. If a man mort- 



20 Fundamental Concepts. [§ 8 

gages his farm for half its value, his real wealth in land is 
reduced one-half; but the title to the land is still his, and in 
most states, like New York, he pays his property tax on the 
entire value. But this was not always so. Formerly the mort- 
gagee or lender entered upon the land and enjoyed its fruits ; 
later, he still owned the land legally, but left the mortgagor or 
borrower in possession ; now the land remains the property of 
the borrower, subject only to the lien of the lender. From 
the economic point of view the wealth is divided between 
them; legally the land is the property of one party, as in 
former centuries it used to be the property of the other. 
When a man borrows money on mortgage, he is creating a 
new form of property, but not new wealth. There is no more 
land than before, but there is an additional property right in 
the shape of a piece of paper or mortgage which represents 
the title to a certain income. So the real estate and rolling 
stock of a railroad constitute the property of the corporation, 
while the capital stock is the property of the stockholder. 
They form different kinds of property and can be sold sepa- 
rately ; yet this duplication of property rights does not increase 
the amount of wealth in existence. Property is a legal right 
to wealth ; it is not in itself wealth, 

8. Public and Private "Wealth. 

While there is in most cases little difference whether we use 
capital or income as the measure of private wealth, or the 
wealth of the individual, the distinction becomes important in 
the case of public wealth, or the wealth of the community 
as a whole. To compute the national wealth, as some cen- 
suses do, by adding to the government property the capital or 
selling value of all private property is erroneous, because, as 
has just been pointed out, we should be counting many things 
twice. The only true measure of public wealth is income. 

Sometimes it is mistakenly stated that the test of commer- 
cial value cannot be applied to public wealth. It is claimed, 
for instance, that rivers, climate and situation, which are not 



(8] Public and Private Wealth. 21 

and cannot be sold, form the essential constituents of public 
wealth. This involves the same confusion that was encoun- 
tered in discussing the so-called personal wealth of an indi- 
vidual (§4). Rivers and climate do not constitute wealth. 
They enable a country to acquire wealth, just as intelligence 
or strength enables a man to acquire wealth. They are the 
source of wealth, but they are not wealth. America under 
the Indians had the same rivers and climate as now, yet no 
one would speak of the America of a thousand years ago as 
wealthy. Until these natural advantages are converted into 
actual results they do not become wealth. When they are 
finally made to contribute to a flow of income in the shape 
of finished products or services, these products and services 
acquire a commercial value and constitute wealth. The fun- 
damental test of all wealth in modern times is income in the 
shape of benefits that can be parted with, and for which some- 
thing will be given. Public wealth, like private wealth, has a 
commercial value, but public wealth can be estimated only in 
terms of income, not of capital. 

The destruction of private wealth can never of itself increase 
public wealth, but the destruction of some forms of private 
wealth may bring about a far greater increase in other forms 
of private wealth and thus augment the public wealth. The 
abolition of slavery annihilated the wealth of the slaveholder ; 
but it created the property of the former slave in himself, and 
led to such an increase of productive power that the total out- 
put of society was greater than before. The property of a 
gas company may be rendered valueless by the discovery of 
a natural gas field owned by the community, as in Toledo. 
Yet the destruction of the private wealth of the shareholders 
is far more than offset by the fact that each consumer of gas can 
now devote to productive purposes the sums hitherto necessary 
to pay the gas bills. We say, far more than offset, because the 
wealth of the shareholders was a capitalization of profits, while 
the wealth of the gas consumers is now increased by a sum 
equal to the total price of the gas, including both cost and 



22 Fundamental Concepts. [§ 8 

profits. There is, in short, an addition to the net income of 
society, and therefore an increase of public wealth. 

Again, whether the annihilation of private wealth through a 
change from private to public ownership creates public wealth 
or not depends entirely on the success of the undertaking. If 
a government railway can be operated either more cheaply or 
with lower or more equal charges than a private railway, there 
will be an increase of public wealth. The test in every case is 
the flow of income to the individuals that constitute society ; 
but this flow under modern conditions always has a commercial 
value. 

Since income is the only adequate test of public wealth, we 
can speak of a wealthy country in two senses. If we think of 
the aggregate income, a large country will be called wealthier 
than a small one ; if we think of the average per capita income, 
a small country, like Belgium, would be wealthier than a large 
one like Russia. Inasmuch as the real object of our study is 
not wealth in itself, but man in his relation to wealth, it is 
clear that the second use of the term is preferable. It is the 
</ participation of an individual in the wealth of the community 
that makes social prosperity. 

The true scope of economics is therefore the study of the 
forces which contribute to the growth of the social income or 
public wealth, and which regulate the shares of classes and 
individuals in this flow of wealth. 



CHAPTER II. 



ECONOMIC LAW AND METHOD. 



9. References. 

L. Cossa, IntrodHctio7t to Political Economy (1893), Theoret. Part, chs. 
iii, vi ; J. Keynes, Scope and Method of Political Economy (3d ed., 1904), 
chs. ii-iv, vii-viii ; J. E. Cairnes, Character and Logical Method of Political 
Economy (2d ed., 1875), Lects. 3, 4; A. Marshall, Principles (5th ed., 
1907), bk. i. chs. V, vi ; N. G. Pierson, Principles of Economics (1902), 
Introd. ; A. W. Flux, Principles {\<^oa,), ch. i ; F. A. Walker, Political 
Economy (3d ed., 1888), part i ; E. R. A. Seligman, Ecotiomic Interpreta- 
tion of History (1902), part 2, ch. iii; W. J. Ashley, Surveys (1900), 
Preliminaries; A. C. Bowley, Statistics (1901), ch. i; K. Mayo-Smith, 
Statistics and Ecotiomics (1899), ch. i; H. Sidgwick, Scope and Method 
of Economic Science (1S86), and in Miscellaneous Essays and Addresses 
(1904); G. C. Lewis, On the Methods of Observation and Reasoning in 
Politics (1852), ch. iii; A. Wagner, On the Present State of Political 
Economy (Quart. Jour. Econ., I, 18S6) ; E. A. Ross, The Foundations 
of Sociology (1905), chs. i, ii. 

On the Mathematical Method. W. S. Jevons, Theory of Politi- 
cal Economy (2d ed., 1879), Preface; F. Y. Edgeworth, (i) Mathe- 
matical Psychics (1881); (2) Oti the Application of Mathematics to 
Political Economy (Jour. Stat. Soc, LIT, 1S89) ; (3) On the Representa- 
tion of Statistics by Mathematical FormidcE {Ibid., LXI-LXII, 1898- 
1899) ; !• Fisher, Mathematical Investigations in the Theory of Value 
and Prices in Conn. Acad., Transactions, IX (1892) ; C. Cunynghame, 
A Geotnetrical Political Economy (1904). 



10. Meaning of Economic Law. 

It is sometimes questioned whether there are such things as 
economic laws. The problem has often been complicated by 
the failure to distinguish between the various meanings of the 
term law. (i) Law may denote a body of customary usages, 
as the common law, or primitive law. (2) Law may mean a 

23 



24 Economic Law and Method. [§ lo 

statutory enactment, as a law of Congress. (3) Law may sig- 
nify a rule of action or a precept, as a moral law. (4) Law 
may mean the statement of relations of cause and effect 
between phenomena, as a law of physics. When we speak of 
economic law, we properly use the word in the last sense. 
Everything that happens in the universe is related either as 
cause or as effect to some other thing. It is the function of 
science to ascertain this relation, and to formulate the law 
which explains the relation. In this sense every scientific 
law is a natural law, because it deals with the phenomena of 
nature, because it explains the natural or necessary relations 
between things. A scientific law states that definite causes 
necessarily lead to definite results. 

Since economics is the science of industrial relations, an 
economic law is a natural law so far as it interprets the rela- 
tions of human nature to industrial facts. Everything that 
occurs in economic life takes place in accordance with some 
law ; it is the function of the economist to ascertain this law. 
Only in this sense can we speak of an immutable economic 
law. An economic law does not mean a precept or rule of 
action ; there is nothing immutable about a rule of action. 
To speak of a law of free trade, for instance, is unmeaning. 
An economic law affirms that if certain causes exist, certain 
results are sure to follow. The facts themselves, whether of 
human nature or of the outward world, may differ ; but given 
definite facts, definite consequences will ensue. The relation 
between these facts is capable of being expressed in a state- 
ment of cause and effect, which we call a scientific law. 

It must not be overlooked, however, that economic laws 
are essentially hypothetical. We must be quite sure that the 
premises are true to actual life before we can draw a conclusion 
applicable to existing facts. So far as the premises are only 
partially true, the conclusions are only partly valid. This does 
indeed not prove that there are no economic laws, but only 
that the law may not yet have been ascertained, or that the 
particular statement of the law in question is only provisional. 



§ lo] Economic Law. 25 

In this respect economic law does not differ from any other 
scientific law. 

In one point, however, the laws of all the social sciences do 
differ from those of natural science. The social sciences deal 
with man, and man is himself a continually changing factor. 
Man is a product of history ; economic institutions, like all 
other social facts, have their roots in the past. What is, is the 
outcome of what has been. With every mutation in outward 
conditions and social relations there comes a change in the 
economic facts or in the methods devised to secure adaptation 
of means to end. Nothing is so rare as the historical per- 
spective ; nothing so difficult to realize as the relativity of 
existing institutions. At one stage of scientific inquiry, for 
instance, it was assumed that private property was a natural 
phenomenon, an outcome of the very nature of man. It is 
now seen that private property is not an absolute, but an his- 
torical category ; that the conception itself was of slow growth, 
and that its content varies from age to age. What is true of 
private property is true of almost every other economic institu- 
tion. It has grown to be what it is ; it has once been differ- 
ent, and will again be different. While there is life, there will 
be change. 

In outward nature, on the other hand, we operate with 
forces that are in one sense unchanging. For instance, in dis- 
cussing physical or astronomical facts we are justified in taking 
for granted the existence of gravitation. In discussing econo- 
mic facts, however, it would not be safe to assume in every 
case the existence, in unimpaired activity, of the motive of self- 
interest. Not only may there be counteracting forces — for 
that is true also of physics — but the motive itself may suffer a 
change. We cannot appeal to the natural law of self-interest 
in the same sense that we speak of the natural law of gravita- 
tion. The one is dependent on man, the other is independent 
of man. In this sense there are no "natural" laws in social - 
science. The frequent appeal in current discussion to the 
natural laws of society as something apart from man, and over 



26 Economic Law and Method. [§ lo 

which he has no control, is erroneous. There are no natural 
laws in the sense that man himself is powerless to alter the 
conditions which form the basis of the statement. 

The French school of Physiocrats in the eighteenth century 
first applied to economics the conception of natural law as a 
part of the order of nature, from the overwhelming necessity 
of which no one could escape. John Stuart Mill, although he 
still held fast to the old conception of natural law as applied 
to production, pointed out that the laws of distribution were 
themselves capable of being modified by human agency. 
Modern science has shown that what is true of distribution is 
equally true of production, and that there is no natural law as 
a part of a natural order in any field of economic inquiry. 
The old conception of natural law has been abandoned in 
economics, as it has been given up in politics and jurispru- 
dence. In its stead has been put the more modern idea of 
natural law, in the sense of scientific law. Modern natural 
law is essentially hypothetical in character and carries with it 
no moral implication. 

We must be careful, then, not to confuse the two concep- 
tions. An economic law is a natural law so far as it states that 
given conditions will lead to given results. An economic law 
is not a natural law so far as it implies that human effort is 
impotent to modify the conditions which lead to the results. 

It was as a protest against the natural law of the old econo- 
mists that the term historical law was introduced. Some of the 
newer writers urged that the essential point was to study the 
evolution of economic law itself as embodied in the changes 
of economic hfe. To them the only economic laws were the 
historical laws which throw light upon the growth of society 
and trace the development of economic relations. This, 
however, also involved an exaggeration, in that it put more 
emphasis on the past than on the present, and often failed to 
afford an adequate analysis of existing facts. This particular 
controversy has now fortunately been laid to rest. 

Another objection to the idea of economic law may be men- 



§ ii] Economic Investigation. ''.y 

tioned. We frequently hear it said that something is true in 
theory but not in practice. The fallacy of this statement is 
evident when we reflect that a theory is nothing but the formu- 
lation of a law, a statement of the necessary relations between 
facts. If a thing is true in theory, it must be true in practice. 
The difficulty is to formulate the correct theory. When people 
say it is easy to " theorize," they mean that it is easy to frame 
an alleged theory. Nothing is harder than to construct a true 
theory. For a true theory must fit into every fact ; otherwise 
it is not the correct theory. The hasty and untrue generaliza- 
tions of those that set themselves up as " theorists " are really 
responsible for the seeming antagonism. There can be as little 
divergence between true economic theory and actual economic 
life as between the theory of chemistry and chemical phe- 
nomena. It is the theory which must be made to fit the facts, 
and not the facts which must be twisted to suit the theory. 

11. Methods of Economic Investigation. 

With the broader conception of economic relations, the old 
contest over method has been relegated to the background. 
It was formerly much discussed whether economics was a de- 
ductive or an inductive science ; whether, in other words, we 
should start out from certain general principles, or attempt 
to reach these principles through the interrogation of facts. 
Sometimes the contrast between them was expressed by the 
term abstract or analytical, as opposed to the concrete or his- 
torical or comparative method. 

There is at present a substantial agreement among econo- 
mists that both methods are correct, and that it would be a 
mistake to assert the predominance of either. It is a ques- 
tion not of economics in general, but of the particular prob- 
lems to be solved. In some the one method is more fruitful, 
in some the other. In such a problem as the incidence of 
taxation the historical or inductive method would be of little 
avail, because of the difficulty of disentangling the fundamental 
cause from among the complicated facts of actual life. In 



28 Economic Law and Method. [§12 

such a problem as the variation between piece wages and time 
wages the deductive or abstract method would probably not 
bring us to our goal so quickly. Each method has its advan- 
tages and its limitations. In the deductive method we can be 
sure of our conclusions only after checking them by the facts; 
in the inductive method we cannot formulate the law until we 
find that it is in harmony with well-established principles. 
In the one case we start from the principle and reach the 
facts ; in the other we start from the facts and attain the prin- 
ciple. Neither can be successfully divorced from the other. 
In most cases of reasoning, indeed, we use, consciously or 
unconsciously, each method in turn. 

Each method, again, when pushed to an extreme is either 
dangerous or barren. The earlier advocates of the abstract 
or analytical school sometimes framed their generahzations 
hastily, and, through their failure to make allowance for the 
numberless counteracting tendencies, often gave an appearance 
of unreality to their conclusions. Such, for example, was the 
celebrated wages-fund theory (§ 174). The more ardent fol- 
lowers of the concrete or historical school have sometimes ex- 
aggerated the difficulty of reaching general laws at all, and 
have left us to wander aimlessly in the forest of facts, putting 
off to an ever-distant day their analysis and utilization. On the 
other hand, the more moderate advocates of each method have 
accomplished a real advance. The historical school has shown 
that we can really understand what is only through a com- 
prehension of what has been, and that the problems of funda- 
mental importance to social well-being are those of change. 
The analytical school has shown that the particular is of 
value only as illustrating the general, and that no true progress 
in economic reasoning can take place until we frankly recog- 
nize the need and the existence of general principles. 

12. Relation of Economics to Other Sciences. 

In the modern hierarchy of thought the points of contact 
between the various sciences are continually becoming more 



§ 12] Relation to Other Sciences. 29 

numerous. We recognize the possibility of regarding facts 
from different points of view. With increasing differentiation, 
on the other hand, there also comes the recognition of in- 
creasing unity. 

With some sciences the points of contact have been empha- 
sized only in recent years, — as, for instance, with psychology 
and biology. The economist whose chief concern is with the 
law of value necessarily operates with the data of psychology. 
Value can have no existence apart from the mental conditions 
of man. The whole conception of demand is essentially psycho- 
logical. While, however, the connection between psychology 
and economics is real and intimate, it may be doubted whether 
the psychological treatment of economic relations can carry us 
much further than to the comprehension of the elementary 
principles of valuation. In the same way, it was at one time 
the fashion to apply biological concepts to economic life, and 
to speak of the economic organism, the economic structure 
and the economic functions. It is, however, coming more and 
more to be recognized that these are vague analogies rather than 
identities ; that the laws of life in the economic world are not 
the same as those in the physical world ; and that the only 
real aid which biology can give to economics is to enforce the 
conviction that in social as in animal life there is continual 
growth and perpetual change. 

With another class of sciences, mathematics and statistics, 
the relation is more intimate, but primarily from the point of 
view of method. Economics deals in one sense with quanti- 
tative relations. Market values are expressed in figures ; and 
mathematics is of undoubted aid in enabling us to niake a 
short cut, as it were, through the mazes of figures. Both 
algebra and geometry have frequently been employed with 
success ; and it is remarkable that some of the greatest steps 
in advance in the pure theory of economics have been taken 
by those who, like Cournot or Gossen or Jevons or Marshall, 
approached the subject from the mathematical side. The 
advocates of the mathematical method, however, are apt to 



3© Economic Law and Method. [§ 13 

overshoot the mark. They oftea forget that the range of ques- 
tions with which they can deal is essentially limited, because so- 
cial processes cannot readily be reduced to exact quantitative 
form. They do not always remember that the variables with 
which they operate are often precisely the important factors in 
social life ; and that human aspirations and human needs can- 
not be pent up within the confines of a mathematical formula, 
no matter how broad it may appear. Within a narrow field 
the mathematical method can be used to great advantage, but 
it will always be of more use to the writer than to the reader. 

In the case of statistics the danger is of the opposite kind. 
In mathematics the difficulty is to get a law which will not be 
so all-embracing as to be inapplicable to real life. In statis- 
tics, even granted that we have collected the true figures, the 
difficulty consists in distilling from them any general principle 
of lasting value. In the first case we run the risk of formu- 
lating unrealities ; in the second of stating platitudes. What 
was said in a preceding section of the abstract and the con- 
crete methods of investigation applies with augmented force 
here. The mathematical method is the abstract method 
pushed to an extreme ; the statistical method is the concrete 
method pushed to a like extreme. Statistics form an indis- 
pensable adjunct to economic inquiry, but they are of value 
principally for purposes of illustration rather than of construc- 
tion. They show us that there is a reign of law in the moral as 
well as in the physical world ; they do not always enable us to 
ascertain the law. 

1/13. Relation of Economics to Politics and Other Moral 
Sciences. 

When, however, we come to the moral sciences, of which 
economics itself is one, we notice a more intimate relation^ 
These are pontics, jurisprudence and ethics. 

(i) The study of politics or the science of the state has 
gone through several stages. For a long time history was 
dominated by the "great man" theory of politics; attention 



§ 13] Relation to Politics. 31 

was centred chiefly in the kings and the battles, the court 
intrigues and military problems. At a later period more em- 
phasis was put on the development of institutions compared 
with which any individual, however eminent, was insignificant. 
Finally, it was recognized that political life itself is closely in- 
tertwined with the economic life, and that the forms as well as 
the practices of government are profoundly influenced by the 
conditions of production as well as by those of distribution. 
Economic facts would then be the cause ; political phenomena •' 
the result. 

On the other hand, since all modern economic action is 
carried on within the framework of the state, when we deal 
with any practical economic institution no final solution of the 
problem can be reached until the effect of the political condi- 
tions be weighed. In discussing the economic consequences of 
government ownership, for instance, the status of the govern- 
mental civil service is a potent consideration. Political facts 
may profoundly modify the economic conditions, instead of 
being modified by them. While, therefore, politics deals with 
the relation of the individual to the government, and eco- 
nomics with one aspect of the relations of individuals to each 
other, there is almost always a distinct interaction between the 
two. It is a necessity for the publicist to comprehend the 
economic basis of political evolution ; it is the business of 
the economist to remember the ■ political conditions which 
affect economic phenomena. 

(2) What has been said of politics applies with still greater 
force to jurisprudence. All systems of law are in the main the 
crystallization of long-continued social usage. Social customs 
are coeval with the origin and growth of society itself; the 
mandatory force of the positive law comes at a later stage in 
the evolution. The unwritten gradually turns into the written 
law, until the positive enactment is invested with the sanction 
of a sovereign command. As society develops, the law is in 
a perpetual process of change. No code is final ; it always - 
represents a given stage of social life. The law is the outward 



32 Economic Law and Method. [§ 13 

manifestation ; the social, and especially the economic, fact is 
the living force. The formal juristic conception may remain 
the same ; its content must be modified by every change of 
economic life. Legal history is really a handmaid to economic 
history ; legal development is inexplicable apart from economic 
forces. The economic fact in this sense is the cause ; the legal 
•/ situation is the result. 

At any given moment, however, economic phenomena take 
place within a legal framework. The elemental forces of eco- 
nomic life cannot indeed in the long run be conditioned 
by legal forms ; but the law may for a time hold in check, or 
give a new direction to, economic forces. Take as an example 
the English law of primogeniture and of entailed estates as 
compared with the French laws which have led to the system 
of small farms. History is full of instances where the law has 
for good or for evil affected the economic environment. Just 
because the ecoiwmic life, however, is prior to the legal system, 
there is always, at any given moment, the danger of a lack of 
harmony between the two. It is in the interval between the 
economic changes and the readjustment of the legal facts that 
the influence of law upon economics is keenly felt. Life indeed 
consists of a perpetual adaptation of outward forms to inner 
forces, and thus the economic basis of a legal system is really 
the important fact to the social philosopher. In practical life, 
however, we deal with outward forms, and thus the legal shape 
of the economic relations must never be lost from sight. In 
economics and jurisprudence there is continual action and 
reaction. 

(3) Close as are the relations of economics with both poli- 
tics and jurisprudence, the connection between economics and 
ethics is closer still. This has often been denied. In the 
popular mind there is even an idea that there is a real conflict 
between them. In truth, this seeming conflict can be traced 
back at least as far as Adam Smith ; for he based his system 
of political economy on the principle of self-interest, his system 
of ethics on the principle of sympathy. Thus there grew up 



§ 13] Relation to Politics. 33 

the idea that the two leading motives of human action are the 
purse and the conscience ; that the economic man is repre- 
sented by the one and the ethical man by the other ; that 
there is a hopeless conflict between them ; and that economics 
and ethics have nothing to do with each other. 

The modern view, however, is different. Ethics, like juris- 
prudence and politics, is now recognized as essentially social 
in its origin. All individual ethics are seen to be the outgrowth 
of social ethics. The very conception of right and wrong was 
originally a social conception, afterwards transferred to the 
individual. Since man lives in society, whatever was recog- 
nized as making for the general good came to be regarded 
as the test of morality. For individuals to persist in doing 
what was not for the social benefit must finally have ended in 
the destruction of society, and therefore of the individual him- 
self as a member of society. Social, not individual, utility 
therefore unconsciously became the criterion. When we say 
honesty is the best policy, we do not mean that it is always 
expedient for the particular individual to be honest, for we 
unfortunately know of cases to the contrary. What we mean 
is that honesty is the best policy for society, and therefore has 
become right for the individual as well. Ages upon ages of 
this experience have converted this and similar conclusions 
into a human instinct, and have thus made us realize the 
existence of the categorical imperative as the sovereign moral 
law. The whole ethical progress of man consists in conform- 
ing his actions to the ideal social welfare. 

There can therefore be no conflict between correct economic 
action and true ethical theory. Adam Smith's principles are 
indeed true, but they are complementary, not antagonistic. 
Sympathy or altruism pushed to an extreme involves the v 
destruction of self and therefore the death of society; self- 
interest or egoism pushed to an extreme means the destruc- 
tion of others and therefore likewise the death of society. 
Social life can endure only through a balancing of these two 
principles, each reinforced by the other. Since economics, 

3 



34 Economic Law and Method. [§ 14 

like ethics, is primarily a social science, the true economic 
action must in the long run be an ethical action. An indi- 
vidual may pursue selfish economic ends, and may augment 
his own wealth at the cost of moral progress ; but he is then 
subordinating public to private considerations. Broadly speak- 
ing, and regarded from the point of view of society as a whole, 
what is economically advantageous must in the long run be 
right ; and what is correct in ethics must in the end also be 
profitable to the business world. The modern economist there- 
fore has become just as mindful of the ethical aspects of every 
economic problem as the modern moralist has been forced to 
recognize the economic side of his ethical problem. 

14. Scope of Economics. 

From what has been said it will be seen that the scope of 
economics is varied. This cannot be expressed in the old 
way by distinguishing between pure economics and applied or 
practical economics. In the first place, no such sharp line 
can be drawn ; arid, secondly, even if the two parts could be 
distinguished, they would not cover the whole field of economic 
inquiry. 

The distinction between pure and applied economics has 
been much exaggerated. If the study of economic theory has 
any justification at all, it must fit into the facts of actual busi- 
ness life. There may, indeed, be such a thing as pure mathe- 
matics, which discusses conclusions from premises that exist 
only in the mind of the investigator and find no counterpart in 
actual life. But if there is such a thing as pure economics in 
this sense, it would be of no earthly use except as a logical 
exercise or a play of the imagination. Economics is the sci- 
ence of industrial relations, — not as they might exist hypo- 
thetically in the mind of the investigator, but as they really 
exist. Economic law must explain economic facts; the law 
inheres in the facts, the facts are the embodiment and illus- 
tration of the law. The attempted distinction between pure 
and applied economics is a clumsy way of putting the emphasis 



§ 14] Scope of Economics. 35 

on the two sides of the same thing, — the law in its relation to 
the facts. 

Sometimes the distinction is expressed in another way, as 
when economic science is opposed to economic art. This is 
indeed a distinction ; but economic art does not deal with 
principles at all, it deals with precepts. Economic art is an 
awkward expression for the economics of statesmanship. The 
legislator practises economic art; he may or may not study 
economic principle. If, however, he runs counter to the 
principle, he cannot succeed in the art. 

In the second place, the old distinction between pure and 
applied economics is untenable, because the discipline, whether 
in its abstract form or in its application, is made to deal only 
with actual conditions. The preceding analysis has disclosed 
the inadequacy of this point of view. Economics is to teach 
us to understand the principles of industrial life. Its chief 
object, indeed, is to explain to us what is. If all society, how- 
ever, is the result of an evolution, we can understand what is 
only by knowing what has been. Moreover, if the relation 
of economics to ethics is such a close one, it is equally evi- 
dent that we can criticise the present not only in the light 
of the past, but in the light of the future ; and that a dis- 
cussion of social tendencies at once brings up the question 
of what ought to be. Economic inquiry is teleological as 
well as historical. 

In every phase of our study, therefore, we must endeavor first 
to ascertain how the particular relations have come to be what 
they are ; secondly, to explain what are the conditions of the 
problem as it actually exists ; and, finally, to forecast the prob- 
able changes in the institutions as a result of an alteration in 
the conditions of the problem. Economic science, in short, 
while it deals primarily with the present, cannot avert its glance 
from the past or from the future. 



Part II. 
Elements of Economic Life. 



Book I. 
Foundations of Economic Life. 



CHAPTER III. 
THE NATURAL ENVIRONMENT. 

15. References. 

C. de Montesquieu, Spirit of the Laws (last ed., 1902) ; H. T. Buckle, His- 
tory of Civilization in England {b&st ed., 3 vols., 1873) > H. Spencer, Princi- 
ples of Sociology, I (1882), part i, ch. iii; E. J. Payne, History of America, 
I (1892), 298-480; Livingston Farrand, Basis of American History (Am. 
Nation, II, 1905), chs. i-iv ; Ellen C. Semple, American History and its 
Geographical Conditions (1903); A. P. Brigham, Geographic Infltiences in 
America7i History (1903); G. G. Chisholm, Handbook of Commercial 
Geography (4th ed., 1903); S. Trotter, Geography of Commerce (1903); 
N. S. Shaler, The United States (2 vols., 1894) ; and Nature aiid Man in 
America (1891) ; R. S. Tarr, Economic Geology of the United States (1900) ; 
F. H. Newell, Irrigation in the United States (1902); E. Mead, Irriga- 
tion Institutions (1902) ; W. E. Smythe, The Conquest of Arid America 
(1900) ; R. M. Hurd, Principles of City Land Values (1903), chs. iii, iv ; 
Ross, Foundations of Sociology (1905), chs. viii, x. 

16. Climatic and Geological Conditions. 

Man, like all animals, is indissolubly bound to the soil. He 
is in last resort dependent upon nature for what he is and what 
he has accomplished. This is especially true of his economic 



§ i6] Climatic Conditions. 37 

life, which, as we have seen, consists ultimately of his relations 
to material things. The basis of economic activity is the 
material environment. The modern sciences of geology, of 
meteorology and of commercial and anthropo-geography have 
enabled us to comprehend phenomena whose significance was 
until recently but vaguely apprehended. The economic aspects 
of the natural environment may be subsumed under the four 
heads of the climate, the geological structure, the flora and 
fauna and the geographical location. 

Only a portion of the globe is habitable. The uninhabitable 
parts, moreover, change with the geologic ages. Large sec- 
tions of Northern Europe and America which are now the 
homes of a vast population were aeons ago in the perpetual 
embrace of the ice king. On the other hand, explorations 
in the sandy wastes of the Asiatic deserts have brought to 
hght the ruins of numerous and populous cities. Not only 
economic life, but all life, is at the mercy of the elemental 
forces of nature. 

Even in the habitable portions of the globe the climatic con- 
ditions are of the first importance. At the very outset the 
influence of temperature is obvious. The rigor of the arctic 
regions and the bounty of the tropical zone are alike hostile 
to economic progress. Where the food supply is scanty and 
the low temperature benumbing, human resources are taxed to 
the utmost in securing the bare wherewithal of life, and no 
surplus energy is left to accumulate a store of wealth. Where, 
on the other hand, nature pours out her treasures with a lavish 
hand, and the torrid heat enervates and lulls into lethargy, 
scarcely any activity is needed to procure subsistence, and 
little is ordinarily exerted for other purposes. Although we 
have had civilization in hot countries, the real home of the 
greatest economic progress has always been in the temperate 
zones, where man is goaded out of his natural laziness by the 
prick of want, and lured on to effort by the hope of reward. 

In many other ways does climate affect economic life. The 
alternations of heat and cold, both seasonal and occasional, 



38 Natural Environment. [§ 16 

are of commanding importance. The character and length of 
the seasonal alternations condition the size and quality of the 
harvest. The variations of intra-seasonal temperature with 
its sudden oscillations go far to explain the nervous, active 
American temperament and its economic results, as compared 
with the comparative stolidity of the English, due to an equable 
climate. Scarcely second to the influence of temperature is 
the significance of the rainfall and the humidity. Insufficiency 
of moisture and lack of sunshine are alike inimical to economic 
welfare. Not only will diiferences in rainfall affect the forestry 
conditions, as well as the size and therefore the economic 
utility of the rivers, but in addition the laborious contest 
with a semi-arid region will create in the individual stalwart 
economic and political qualities. The so-called Anglo-Saxon 
individualism is largely the product of climatic conditions. 
When the Englishman leaves his moist and fertile home for the 
almost riverless wastes of the antipodes, he becomes, if not a 
socialist, at all events the next remove to one. In Australia we 
accordingly find government railroads, government insurance, 
government steamships, government frozen-meat industry and 
many other examples of government activity which would be 
viewed with dismay in the mother country. 

In the same way the individuahst theory in America is 
largely the product of definite economic conditions, resting on 
a new climatic environment. What careful interpreter of 
American history does not know that the arduous struggles 
with a rebellious soil and an inhospitable climate caused the 
American of a century ago to turn to government whenever he 
'thought he might secure help? State roads, state canals, state 
railroads, state bounties, state enterprises of all kinds suited to 
the needs of the settlers were the order of the day. When, 
however, the mountains had been crossed and the fertile valleys 
of the Middle West, with abundant rainfall and a genial climate, 
had been reached, there came a wondrous change. Conscious 
of their new opportunities, the citizens now desired only to be 
let alone in their quest for prosperity. Private initiative 



§ i6] Geological Conditions. 39 

replaced government assistance and the age of corporations 
was ushered in. Insensibly the theory of governmental func- 
tions changed, and the doctrine of laissez /aire carried all 
before it. The theory of individualism was a natural result of 
the economic, and at bottom of the climatic, conditions of a 
new environment. 

While the climate is one of the causes that influence the 
earth's surface, the economic life is profoundly affected by the 
entire geological formation. In the first place we have the 
fundamental fact of altitude, including the distinction between 
mountain and valley, coast and plain, with their varying degrees 
of production. Furthermore, upon the chemical ingredients 
and the physical constituency of the soil rests in last analysis 
its original fruitfulness. The difiference between the soil of the 
black belt and the hill lands of Alabama explains the varying 
aspect of the negro problem there ; and in like manner the 
contrast between the arable and the grazing lands of the Far West 
enables us to comprehend the economic and political conflicts 
between the farmer and the ranchman. 

Of still more importance than the surface of the earth is 
what lies beneath the surface. There are writers who interpret 
the entire progress of humanity in terms of the metals. While 
this is assuredly an exaggeration, there is no doubt that the 
metals have played a dominating role in the history of economic 
progress. In more primitive times the advance of civilization 
was in many places in large measure bound up with the copper 
and tin deposits. Even at present, with the active interchange 
of commodities, the mineral wealth in the shape of copper and 
iron fields, gold and silver mines, lead and tin deposits, goes 
far to explain the preponderance of the fortunate countries or 
sections where they are found. If we add to the metals the 
coal, the diamond and the oil fields, we shall readily recog- 
nize the enormous influence exerted, especially in modern 
times, by the existence of these mineral treasures in such 
places as Colorado, Pennsylvania, Western England, and South 
Africa. 



40 Natural Environment. [§ 17 

17. The Flora, the Fauna and the Geographical Location. 

The character and extent of the vegetable and animal life 
are a result of the climatic and geological conditions that have 
just been mentioned. Upon the union in proper proportions 
of rain, sun and chemical ingredients of the soil depends the 
possibility of raising all the staple crops like hay, wheat, 
cotton, rice, tobacco, sugar, coffee or tea, or of obtaining the 
timber, rubber, cork and other products of the forest. The 
American Indian civilization was built up to a large degree 
on maize, as that of the Asiatic Indian largely rested on rice. 
If cotton was king in the South before the war, wheat and hay 
were to a great extent the monarchs in the North. The con- 
trol of these natural resources is responsible for many of the 
mutations of nations. To give only two examples : the strug- 
gle for the spice islands of the East is the key that unlocks the 
mysteries of the European political contests of the sixteenth 
and seventeenth centuries ; the sugar situation in Cuba led to 
the revolution which brought about our recent Spanish war, 
and thus indirectly the expansion of the American republic 
into imperialism. 

Of at least equal importance in early economic progress 
is the existence of animals that can easily be domesticated. 
The fact that the horse, the cow and the sheep were found in 
Asia rendered possible the transition from the hunting to the 
pastoral stage and laid the foundation of the later economic 
edifice of the more advanced Asiatic and European races. 
For these animals subserved the various ends not only of food 
supply and provision of clothing, but of means of locomotion 
and above all of beast of burden. Their absence in recent 
geological periods in America was perhaps the chief cause of 
the backwardness of the Indians. Where a relatively advanced 
civilization was reached, as by the Incas in Peru, it was in great 
part due to the existence of the llama, although the inferiority 
of this animal to the horse, the cow and the sheep explains in 
large measure the backwardness of the South American civili- 



§ 17] Geographical Location. 41 

zation. In Australia there was not even this resource, for the 
kangaroo could not be utilized and the blackfellow remained 
a savage. 

In contrast to the flora and fauna which are of importance 
from the first, favorable situation, although it also plays a role 
from the outset, becomes of signal importance in the later 
stages of economic life when commerce has developed. Prox- 
imity to the sea, possession of a safe and ample harbor, loca- 
tion on a river, — all these explain the maritime supremacy on 
which so much of past civilization has rested. It is no mere 
accident that the world's progress centred for many centuries 
around the Mediterranean, and that Egypt, Greece and Rome 
in turn controlled for thousands of years the destinies of the 
human race. Passing over the mediaeval Italian seaports and 
the German Hansa towns, it is again significant that the two 
greatest metropolitan centres of the world to-day, London and 
New York, have attained their position chiefly because of their 
maritime importance. Some writers have even gone so far as ^ 
to maintain that all civilization can be expressed in terms of 
the great rivers and seas. Of the twenty largest cities of the / 
United States, nine are found on the seacoast, five on the 
Northern lakes, and five on the Mississippi and Ohio rivers. 

It would, however, be a mistake to lay too much stress upon 
mere water communication. Trade conducted on terra Jirnia 
has played a scarcely smaller role. Many a populous city is 
nothing but the development of a cross-roads village, become 
the busy mart of transit on a great thoroughfare. The centres 
of the Babylonian and Assyrian civilization of old were largely 
of this character ; and to a similar favorable inland situation 
must we ascribe the prosperity of numerous cities in all parts 
of the world to-day, such as Berlin, Manchester (England), 
and Denver, especially where the rivers are few or small. A 
distinguished French author, Demolins, has even ventured to 
explain the existence of the primary social types of humanity 
by the land routes which the various nations traversed in the 
course of the long migrations from their ancestral home to 



42 Natural Environment. [§ i8 

their present abodes. However exaggerated this insistence 
upon a single factor may be, there is little doubt as to the car- 
dinal influence of location upon commercial opportunities. 

With the further development of economic life, commerce 
becomes a handmaid not only to agriculture but to industry. 
The industrial centres are dependent not only on the commer- 
cial facilities for disposing of their products, but also upon the 
ease with which they can secure the raw material and cheap 
power. Contiguity to the coal and iron fields explains the 
growth of the great steel industries. The presence of local 
water power made possible the early centres of the textile 
industries in New England, as well as the rapid growth of 
Minneapohs in milling. The grain fields of the Middle West 
are responsible for the breweries in the Western and the distil- 
leries in the Eastern States adjoining the Mississippi. The 
slaughtering and meat-packing centres have gradually moved 
west with the change in the ranching frontier, and the incipient 
industries of the Pacific slope are still largely determined by 
their propinquity to the forests, the orchards or the river 
fisheries. 

18. Changes in Environment. 

While man is thus subservient to nature in his economic 
activities, the subjection is not complete. In fact the distin- 
guishing mark of difference between men and animals is that 
while the natural environment moulds all living things, man 
alone can to some extent modify the environment. This 
partial control of economic resources depends on the spread 
of intelligence, the growth of technique and the command 
that science gives over the forces of nature. 

Of all the natural conditions the climate is the most difficult 
to alter. Yet even here a beginning has been made. We pass 
over with a mere mention such minor points as the mitigation 
of the effects of undue heat through the introduction of artifi- 
cial ice, or the creation of the proper atmospheric conditions 
in certain factories. More significant are the effects of forestry ♦ 
and irrigation. It is now coming to be recognized that forests 



i^ i8] Changes in Environment. 43 

play an important role, not so much in affecting the rainfall, as 
in equalizing the flow of the rivers and thus obviating the sudden 
alternations of inundation and drouth with their devastating 
effects on cultivation. The afforestation of treeless lands and 
the reforestation of denuded hillsides are at present a part 
of the economic policy of every careful government. The 
marked increase in the American forest reservations, state as 
well as national, is therefore a subject for congratulation. 

The conditions of moisture are further affected by the 
drainage and reclamation of swamps and marshes. Prominent 
illustrations of such effects are visible in the English fens and 
the once submerged, but now dyke-protected, lands of Holland. 
The history of the Italian Maremma, again, shows the alternate 
consequences of neglect and intelligent effort on climate and 
soil. Even greater results can be achieved by diminishing 
aridity rather than by decreasing excessive moisture. Irrigation 
was practised by the Babylonians, the Persians and other na- 
tions of antiquity, and on a somewhat larger scale by the Arabs 
of mediaeval Spain. The recent damming of the Nile by the 
British constitutes perhaps the high-water mark of modern 
achievement. It is in the United States, however, that the 
greatest conquests of irrigation are to be expected. With the 
gradual exhaustion of the arable area in our public domain the 
demand for a reclamation of the so-called arid lands has been 
urged with increasing intensity. The success of the Mormons 
in Utah and the efforts of a few private companies in California 
and elsewhere in converting the desert into a smiling and 
exuberantly fertile district have shown what can be accom- 
plished. The Newlands law of 1902 which set aside for irri- 
gation purposes under national control the large sums to be 
derived from the sales of public lands marks the beginning of 
a new epoch in American history, for it will ultimately lead 
to the recovery of several tens of millions of acres and to the 
influx of corresponding millions of settlers. 

The nature of the soil as affected by geological conditions 
is, as we have seen, of momentous significance. Yet nothing 



44 Natural Environment. [§ i8 

is more certain than the great influence of human effort on the 
character of the soil. Just as the best land can become the 
poorest through wasteful cultivation, so the worst land can be 
converted into the most fruitful. The application of manures, 
both animal and mineral, and the replacement of an extensive 
by an intensive cultivation with the proper rotation of crops 
will soon change the chemical ingredients of the soil. The 
problem is not one of technical possibility, but of economic 
profit. Up to this time there has been in the greater part of 
the western world such an abundance of successively fresh 
tracts of land that adequate returns have been achieved by the 
extensive methods of cultivation involving only the most super- 
ficial tillage. Even the so-called more intensive cultivation 
has denoted only the slightest application of capital to land. 
In the Oriental countries, on the other hand, the ignorance of 
scientific agronomy has made intensive culture depend almost 
wholly upon the hand and not the head. What is really meant 
by the possibilities of the application of science and capital 
to agriculture, iii some such proportions as they are now 
utilized in industry, may be faintly discerned in the garden 
patches and truck farms in the neighborhood of great cities. 
In certain parts of Europe, in fact, the tenant on the expira- 
tion of the lease has the right of carting away with him a 
certain depth of soil. The land itself is thus coming to be in 
a sense the product of human energy. 

While the existence of the flora and the fauna ultimately 
depends on the physical environment, there is a large margin 
of indifference within which old species may be reintroduced 
or new ones made to flourish. Many plants in all parts of the 
world are not indigenous. To mention only a few American 
products, rice and cotton in the South, the sugar beet and the 
alfalfa in the West, as well as all kinds of vegetables and fruits 
throughout the length and the breadth of the land, have been 
introduced by human agency from abroad ; and the experiment 
stations are constantly at work improving the seed. To pass 
from plants to animals, there is no need of pointing out the 



§ ip] Changes in Location. 45 

marvellous results accomplished in bettering the breed and 
economic efficiency of the horse, the ox and the sheep, 
none of which were found here in the age of Columbus. 

19. Changes in Location. 

By far the most important achievement of man in altering 
the natural environment is to be seen in his success in over- 
coming the influences of location. This has been effected 
through a threefold improvement in the methods of trans- 
portation and communication, that is, the transportation of 
commodities, the transmission of power and the communi- 
cation of ideas. 

(i) Upon the transportation of commodities has depended 
the growth of all internal trade and international commerce. 
The very conception of commerce involves the transfer of the 
superfluities of one section to the consumers of another, that 
is, the weakening or the annihilation of distance as an eco- 
nomic factor. So long as commerce was dependent upon 
the sail-boat or the slow-moving beast of burden, this annihi- 
lation of distance found its well-defined limits in the cost and 
time of transportation. With the invention of the canal and 
the application of steam and electricity to land and sea trans- 
port, a revolution was effected in the saving of cost and time, 
and perishable as well as bulky commodities were now brought 
within the range of both ordinary and distant trade. The 
railway has largely replaced natural advantages of situation by 
artificial ones. A town on the railway line is for all economic 
purposes nearer the market than another off the line, even if 
possessed of a better natural location. A competitive centre 
at the junction of several roads enjoys a superiority which will 
enable it to overcome a rival more advantageously situated by 
nature but less well served. With the increase of facilities and 
lowering of cost, geographical situation is yielding to the facts 
of artificially created location. 

Changes in transportation facilities accordingly are largely 
responsible for the growth and decline of cities, sections and 



46 Natural Environment. [§ 19 

nations. With every shifting of trade routes, communities 
advance and recede. Again to confine ourselves to recent 
history, the completion of the Erie canal in 1825 gave to New 
York, then a city of secondary importance, a position of undis- 
puted pre-eminence ; the construction of many a railroad threw 
into decay the villages on the old post- roads not served by 
the new lines ; the piercing of the Isthmus of Panama by the 
interoceanic canal will have the most far-reaching conse- 
quences on the industrial efficiency of the South and the 
prosperity of Great Britain. 

(2) If transportation of this kind is so potent in affecting 
the distribution of commodities and thus, by providing a 
market, indirectly influencing their production, changes in the 
transmission of power are equally effective in their direct 
influence. ■ So far as power is the result of fuel, whether coal, 
wood or oilj it might be claimed that the transmission of power 
is tantamount to the transportation of the commodities out of 
which the power is generated. The recent application of 
electricity, however, bids fair to revolutionize modern industry, 
not only by reducing cost, but by virtually overcoming distance. 
Through transmission of electricity water power is no longer 
limited in its beneficent results to the localities in the imme- 
diate neighborhood. With the gradual extension of the prof- 
itable area of such transmission, we may expect to witness a 
great change in the geographical dependence of industrial 
centres. Moreover, if the day-dreams of certain scientists 
are ever realized, so that in the not distant future we shall 
be able to pick up electricity from the surface of the earth, the 
last link in the chain of the industrial advantages of natural 
location of power will be destroyed. 

It must also not be forgotten that power in industry includes 
not only mechanical power, but human power. The provision, 
of the labor force itself is vitally affected by changes in the 
facilities of transportation. In a modern metropohs it may 
be of comparatively little importance whether it takes a few 
hours more or less to transfer commodities to the home or the 



§ 19] Changes in Location. 47 

factory. Beyond a certain limit, however, almost every minute 
counts in the time required for the human worker to reach his 
home. The introduction of electric transportation prodigiously 
augmented the possible size and industrial power of modern 
cities, but the bringing of the suburbs within the city limits 
has greatly affected values, and changed the relative advan- 
tages, industrial as well as domestic, of outlying and inter- 
mediate areas. There is a well-nigh kaleidoscopic change 
going on in the conditions of geographical location. 

(3) Finally, the communication of intelligence has played 
its part in reducing the significance of geographical location. 
The post, the telegraph and the telephone have co-operated 
with other economic factors in giving to the modern market 
an international character. The least change in the visible 
supply of wheat in Minnesota or of cotton in Texas is reflected 
in the market at Liverpool. Any alteration in the conditions 
of the tobacco yield in Java or of the tea crop in China is felt 
in the exchanges of New York. But, above all, the dependence 
of particular sections or countries upon mere location has 
been weakened in a special sense by the spread of modern 
science. Science is international in its workings ; the utili- 
zation of discovery and invention is no longer the exclusive 
possession of a favored nation. The whole world is becoming 
akin in production, as in consumption. 

Thus it is clear that while external nature still plays its 
fundamental role in explaining the economic life of man, the 
progress of civilization is utilizing in countless ways certain 
natural forces to counteract and to minimize the influence of 
other natural forces. Nature at bottom remains the mistress, 
but man can within certain limits emancipate himself from the 
bondage, and secure a mastery which will insure prosperity 
and progress. 



CHAPTER IV. 
THE POPULATION. 

20. References. 

C. D. Wright, Practical Sociology (Am. Citizen Series, 1904), chs. ii, v, 
viii ; R. Mayo-Smith, Statistics and Sociology (1895), P^"^* i ; A. F. Weber, 
Growth of Cities (1899), chs. iii, v, vi ; Twelfth Census, volumes on Poptk 
lation ; W. F. Willcox, A Discussion of the Increase of Population (Twelfth 
Census, Bulletin, No. 4, 1904) ; U. S. Industrial Commission, Report, XIX 
(1902), 1-13; Tenement HouseDepartmentof New York City, First Report 
(2 vols., 1904) ; W. Ogle, On Marriage Rates attd Marriage Ages (Jour. 
Stat. Soc, LIII, 1890) ; J. Bertillon, Morbidity and Mortality according to 
Occupation (Ibid., LV, 1892) ; F. S. Crum, Marriage Rate in Massa- 
chusetts (Am. Statist. Assoc. Publications, V, 1896), and Birth Rate in 
Massachusetts (Quart. Jour. Econ., XI, 1897) ; R. R. Kuczynski, The 
Fecundity of the Native and Foreign Born Populatio7t in Massachusetts 
[Ibid., XVI, 1902) ; J. Bonar, Malthus and his Work (1885) ; H. Spencer, 
Principles of Biology, part vi, ch. xii ; S. N. Patten, The Law of Popida- 
tion Restated (Vol. Sci. Quart., X, 1895); F. A. Fetter, The Essay of 
Malthus (Yale Review, VII, 1899) > E- ^- Ross, Foundations of Sociology 
(1905), ch. ii; J. B. Clark, Essentials of Economic Theory (1907), ch. xix. 

21. Density of Population. 

While the problem of external nature is primarily physical, 
that of population is principally biological and sociological. 
Population, however, also has its economic aspects. It touches 
the field of production in so far as there is a relation between 
the size and constitution of the population and the creation 
of wealth ; it affects the subject of distribution because with 
a given quantity of production, the per capita dividend will 
obviously be influenced by the size of the divisor. 

The subject falls naturally under the heads of the status 
and the movement of the population. By the status of the 

48 



§ 2i] Density of Population. 49 

population are meant its density and distribution ; under the 
movement of population we have to consider its increase and 
its mobility. 

The density of the population is conditioned by the charac- 
ter of the economic resources and the degree of economic 
development. That is, it depends not only upon the external 
environment, but upon the use made of it by man. The 
density and distribution of population as dependent upon 
drainage, altitude, temperature and humidity, which play a 
considerable role in the tables of the American census, may 
be passed over here as referable to the influence of the natural 
elements. The human element, by transforming the environ- 
ment, becomes the increasingly important factor in economic 
progress. It is manifest, for instance, that the hunting stage 
can support less inhabitants to the square mile than the 
pastoral, and that an agricultural population must be more 
thinly scattered than a population engaged in industry. In 
an agricultural community, again, the density of the population 
will vary with the character of cultivation. Population is in- \/ 
deed conditioned by food supply ; but food supply depends 
not only upon the number of acres but upon the product per 
acre. 

When a community is no longer self-dependent, and carries 
on exchange with another, greater inequality in the density 
of population becomes possible. Industrial and commercial 
communities barter their finished products for the raw materials 
of agricultural sections. While the total population still de- 
pends on the total food supply, the surplus food of the agri- 
cultural group is secured by the industrial and commercial 
group, with the result of a greater concentration of popula- 
tion in the latter. Density of population in any particular 
country or section which has outgrown primitive economic 
conditions thus depends not so much on the production of 
food as on the existence of the wealth which can procure food. 
England had all through the middle ages a far sparser popula- 
tion than France, because although they both exported wheat it 

4 



5© Population. [§ 21 

was more predominantly agricultural ; but in the nineteenth 
century, with the prodigious increase in industry and com- 
merce, England became a food importer and the density of 
the English population soon exceeded that of the French. 
The following table, which gives the number of inhabitants per 
square mile in 1 900-1 901, will show the influence of economic 
conditions on density : 

Belgium 589 Switzerland 207 

England 437 France 188 

Netherlands ...... 416 India ■ . . 167 

United Kingdom .... 344 Spain 97 

Japan 296 Russia ....... 51 

Italy 294 Turkey 2;^ 

Germany 270 United States 25 

China 266 Canada 1.75 

Austria 226 South Australia .... 0.33 

The striking facts here are, first, that a very intensive agri- 
culture combined with a moderate commerce, as in China and 
Japan, can support a population as dense as that of a highly 
developed modern industry ; and secondly, that the greatest 
density is found in those countries, like Belgium, England and 
Holland, which unite very diversified industry with a fairly 
intensive agriculture. The relative capacity of economic 
stages to support population is illustrated by the conditions 
of the United States. The census of 1900, as appears from 
the map opposite page 50, divides the country into six groups 
with a density respectively of less than 2, 2 to 6, 6 to 18, 18 
to 45, 45 to 90, and over 90 inhabitants to the square mile. 
The first group comprises the hunting, trapping, fishing, lum- 
bering and mining sections ; the second includes the grazing 
communities ; the third contains the purely agricultural areas ; 
in the fourth group, still mainly agricultural, commerce and 
manufactures have commenced to make some progress ; while 
in the fifth and sixth groups there is a continually greater 
influence of industry. Computed by states rather than by 
sections, there are eight commonwealths with a density of 
over 100, namely, Ohio, Maryland, Pennsylvania, New York, 



121 117 



13^° 105° 101° 




LlI Under 2 inhab, per Sfi. 

5-liL] 2 to 6 " M •» 
\^ 6 to 18 M 
[ll] 18 to 45 ., 
[l]45 to 90 „ 
LILI 90 and over 



105° Longitude 101° "West fr 



Copyright, 1903, by Longmans, Green & Co. New York & London. 

DISTRIBUTION OF THE POPUI 

[Reproduced from E 




[ON OF THE UNITED STATES, 1900. 

of Twelfth U. S. Census.^ 



§ 22] Concentration of Population. 51 

Connecticut, New Jersey, Massachusetts and Rhode Island. 
The conditions in each state are indicated in the chart 
opposite page 52, It thus appears that in some of the 
industrial commonwealths of the United States the density of 
population is about equal to that of Europe. 

22. Concentration of Population. 

Slightly different from the density is the concentration of 
population. This refers to the distribution between city and 
country. A greater density generally, but not necessarily, 
implies a greater agglomeration. New Hampshire, for in- 
stance, has a greater density of population than California, 
but a smaller urban population. 

The industrial revolution during the nineteenth century and 
the changes in transportation and commerce by which it has 
been attended are chiefly responsible for the drift of popula- 
tion to the cities. In 1790 3.14 per cent of the American 
people lived in cities of 10,000 and more ; a century later the 
seven colonies of Australasia with almost precisely the same 
population as the United States of a century earlier had 33.20 
per cent living in such cities. In 1790 3.40 per cent of the 
population of the United States lived in cities of 8,000 and 
over; in 1900 this proportion had grown to 33.1 percent. 
If we include in urban population centres of 4,000 people, the 
percentage is 37.3. In several states it is far higher. Taking 
the states whose urban concentration exceeds that of the aver- 
age for the entire country, the percentage of the population 
living in cities of at least 8,000 is as follows : Colorado, ^8 ; 
New Hampshire and Ohio, 39 ; Delaware, 41 ; California, 44 ; 
Pennsylvania, 46 ; Maryland and Illinois, 47 ; Connecticut, 53 ; 
New Jersey, 61 ; New York, 69 ; Massachusetts, 76 ; Rhode 
Island, 81. With the exception of Colorado, the chief seat of 
mining activity, it is obvious that these are all industrial and 
commercial centres. In a few states the urban concentration 
even equals or exceeds that of England and Wales, which 
amounted in 1901 to 68 percent in towns over 10,000, and to 



52 Population. [§ 22 

77 per cent in towns over 3,000. Of the other European 
countries Belgium and Holland alone slightly exceed the gen- 
eral average for the United States, while that of Germany is 
about the same, and that of France somewhat less. 

Within the cities themselves the concentration differs in 
various quarters in almost as marked a degree as it does in the 
different parts of a country. The business sections have 
chiefly a day population, the fine residential quarters a com- 
paratively low density, the crowded slums an exceedingly high 
concentration. Although the recent application of electricity 
to transportation has enormously extended the suburban area, 
there are still sections where the congestion in the centres 
increases from year to year, seemingly unaffected by rapid 
transit. In the tenth ward of New York, for instance — 
the most densely populated area of the civilized world — the 
numbers per acre which amounted to 524 in 1890 rose to 670 
in 1904 ; while according to the census made by the Conges- 
tion Exhibit in 1908 eleven blocks had a density of over 1,200. 
Compared with these, the highest European figures seem in- 
significant : Josefstadt in Prague, 485 ; Bonnenouvelle in Paris, 
434; Bethnal Green North in London, 365. 

When we reflect that in the United States as a whole over a 
third, and in several states two-thirds or three-fourths, of the 
people now live in cities, and when we notice that the progress 
of agglomeration is unabated, it is apparent that as a result of 
the changing economic conditions the problems of the national 
life of the future are to be in great measure city problems. 
These, however, are largely social and political. So far as 
they are economic in character they fall principally under 
such heads as the influence of city rents on the cost of 
living and rate of wages, the effects of concentration of labor 
and capital on production and distribution, and the con- 
sequences of urban growth upon depopulation of the rural 
districts and the scarcity of farm labor. Some of these will 
be discussed later. 



NUMBER OF INHABITANTS TO THE SQUARE MILE, 
BY STATES AND TERRITORIES, 1900. 

Note;— This diagram does not include the District of Columbia, which had 

l,6i5.3 inhabitants to the square inile in 1900. 
25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 




RHODE ISLAND. 
MASSACHUSETTS 
NEW JERSEY. 
CONNECTICUT. 

NEW YORK. I 

PENNSYLVANIA 
MARYLAND, 

OHIO- 

DELAWARE 

ILLINOIS 

INDIANA 

KENTUCKY 

TENNESSEE 

VIRGINIA. 

NEW HAMPSHIRE. 

MISSOURI 

S.CAROLINA 

MICHIGAN, 

IOWA. 

N.CAROLINA. 

WEST VIRGINIA 

WISCONSIN 

VERMONT. 

GEORGIA. 

ALABAMA 

MISSISSIPPI 

LOUISIANA 

ARKANSAS 

HAWAII 

MAINE 

MINNESOTA 

KANSAS 

NEBRASKA 

INDIAN TER.--- 

TEXAS 

OKLAHOMA 

FLORIDA 

CALIFORNIA 

WASHINGTON 

S.DAKOTA 

COLORACO. 

N. DAKOTA 

OREGON 

UTAH 

IDAHO. 

MONTANA 

NEW MEXICO.. 

ARIZONA 

WYOMING 

NEVADA 

ALASKA 



"Reproduoed from reports oC Twelfth U. S. Censu; 



§ 23] Distribution of Population. 53 

23. Distribution of Population. 

The other facts of distribution of population which have 
important economic bearings are those of sex, age and occupa- 
tion. The percentage of females affects the labor market to 
the extent that women are wage-earners, while a considerable 
predominance of either sex not only influences marriage and 
fecundity but exerts an effect on social life in general. Under 
normal conditions in modern times there is a slight excess 
of females, in Europe about 1,064 females to 1,000 males. 
Although the birth rate of males exceeds that of females, there 
is generally a greater mortality among males, due in part to 
their more dangerous occupation, in part to their more un- 
regulated life. In less civilized older countries there is usually 
an excess of males, owing in all probability to the fact that 
more of the arduous labor there falls to the lot of the women. 
In new countries like America there is also a slight excess of 
males, ascribable chiefly to immigration, the percentage being 
51.2 males to 48.8 females. The contrast between the older 
and the newer sections is marked, Massachusetts having an 
excess of females (51.3 percent) while Wyoming has only 
37.1 per cent. That the causes affecting distribution by sex 
are largely economic is shown by the fact that in industrial 
and commercial centres, whether American or foreign, where 
the hard work and nervous strain fall chiefly on the men, the 
preponderance of females is always accentuated. 

Distribution by age has important social and political as- 
pects, especially as affecting the school, the voting and the mili- 
tary population.^ For economic purposes, however, the chief 
classification is that of the working population. Although 
the proportions of the productive classes vary considerably 
according to the conditions of child labor, the commonly ac- 
cepted limits are 15 and 65 years respectively. As has often 

^ Of the seventy-six millions of people in the United States in 1900, 
twenty-six millions, male and female, were of the school age (between 5 
and 20), twenty-one millions, male, of the voting age (over 21) and 
sixteen millions, male, of the militia age (18 to 44). 



54 



Population. 



[§ 23 



been pointed out and as is illustrated by the chart below, 
the distribution by age may normally be compared to a pyra- 



POPULATION ACCORDING TO AGE DISTRIBUTION! 



OLD J 
PEOPLE ^ 



ADULTS \ 



INFANTS 































/ \ 


















' /I 
' /' 
'' /' 


l\ 
















/ 


/I 

/ 1 

/ 


\\ 
\ \ 

\ 


















% 


^ 














'\f 


/ 

/ 






\ 
\ 


V 










'1 ' 
'If 










\\\ 








/ 


1/ 

ICQ 










CP\\ 


\ 






/ ^\ 


1 

1 
1 










\1 
\ 

\ 


l-p" N 




/ 


I 


i/IALES 








FE 


\flALE£ 


■V 


\ 


iL— -^'^ 


y 














N 


^"^ 



AGS 
100 
90 
80 
70 
60 
50 
40 
30 
20 
10 



umoer living ooooo OOO o, O 

in each "5 -^eONT-t. thimco-*'«o 

generation. ' 

Triangle X X represents an imaginary population completely stationary, increasing 
annually by a constant number of births and decreasing by an equal number of deaths 
distributed in a precisely equal degree among the various age groups. 

Figure A A represents a population about stationary, with a low birth rate, a low 
death rate and with little immigration or emigration. 

Figure B B represents a population with a high birth rate, a high death rate and much 
emigration. 

American conditions would be represented by a combination of the upper part of A 
and the lower part of B, making the curve look lilce a top. 

mid, with the infants at the bottom and the aged at the top. 
Where population increases rapidly, the base is broad ; where 
it increases slowly, the base is narrow and the upper part of 



1 From Levasseur, La Population Fran^aise, Vol. II (1891), pp. 257- 
260. 



§ 24] 



Increase of Population. 



55 



the pyramid representing the older classes, bulges out, making 
it bell-shaped. Similar results are caused by migratory move- 
ments. In the case of a large immigration the middle-age 
classes expand and the curve may be compared to a top ; in 
the case of emigration the curve sinks in the middle and looks 
like a spindle. It is owing chiefly to this fact that in the in- 
dustrial states as well as in the urban centres, the curve is like 
a top, that is, with the largest proportion of productive classes. 
The difference between industrial and non-industrial states is 
illustrated in the following table of distribution by ages ar- 
ranged by percentages : 



Years 


0-15 


15-65 


65- 


United States 


34-30 
27.36 

3932 


61.66 
67-54 
58-57 


4.04 
5.10 
2.31 


Massachusetts 

South Dakota 





Massachusetts had almost ten per cent more of the productive 
classes than South Dakota. A similar lesson is enforced by 
foreign statistics. 

Distribution by occupation naturally follows very closely the 
utilization of the economic resources. Comparative statistics of 
different countries would therefore be meaningless. In the 
United States the tables on page 56 show the great increase in 
the industrial classes, and throw an interesting light on the 
relative importance of the various industries from the point of 
view of distribution of the population. 



24. Increase of Population. 

The increase of population is normally dependent on the 
existence of marriage. To the children born in wedlock must 
however be added the illegitimate births, which form in dif- 
ferent countries from 3 to 14 per cent of the whole. In some 
large cities like Paris the percentage is as high as 24, and 
where, as formerly in Bavaria, especially severe marriage laws 



S6 



Population. 



[§ 24 



exist, the percentage is even higher. The proportion of single 
persons over 15 years varies from 30 to 50 per cent in dif- 
ferent countries, the percentage in America being 40 for men 

PERCENTAGE OF DISTRIBUTION OF POPULATION IN 
THE UNITED STATES BY OCCUPATIONS. 





1880 


1890 


1900 


Agricultural pursuits 

Professional service 

Domestic and personal service . . . 

Trade and transportation 

Manufacturing and mechanical pursuits 


44-3 
3-5 
19.7 
10.7 
21.8 


377 

4.1 

18.6 

14.6 

25 


35-7 
4-3 
19.2 
16.4 
24.4 



NUMBER OF PERSONS ENGAGED IN VARIOUS 
OCCUPATIONS IN 1900.1 

Carpenters and joiners 600,252 

Dressmakers, seamstresses and milliners 585,685 

Steam-railroad employees 582,150 

Miners and quarrymen 563,866 

Iron and steel workers • . , . 290,611 

Machinists 283,145 

Painters, glaziers and varnishers 277,541 

Cotton-mill operatives 246,004 

Tailors and tailoresses 229,649 

Blacksmiths 226,477 

Engineers and firemen (not locomotive) 223,495 

Boot and shoe makers 208,912 

Saw and planing-mill employees 161,624 

Masons 160,805 

Printers, lithographers and pressmen 1 55,147 

Tobacco and cigar operatives 131,452 

and 31 for women. If, however, we more properly take the 
people between 40 and 60 years as the class that one would 
usually expect to see married, we find that the single persons 
constitute only 12 to 15 per cent of the whole. In the Ameri- 
can cities the proportion of single persons is larger, owing 

1 Exclusive of merchants, clerks, draymen and agents. 



§ 24] Increase of Population. 57 

partly to the postponement of marriage and partly to the large 
immigration of young unmarried persons. The normal mar- 
riage rate in most countries varies from 14 to 18 married 
persons annually for each thousand of the population, with 
considerable variations due to general economic conditions. 
Periods of depression, for instance, naturally diminish the pre- 
disposition to marriage, while on the other hand when the 
conditions for the employment of women are favorable, as in 
some of the New England towns, the marriage rate is excep- 
tionally high. 

Of almost more importance than the frequency of marriage is 
its fecundity. When we compare the number of births with the 
population as a whole, we speak of a crude birth rate ; when we 
compare the births with the number of women of child-bearing 
age (15 to 50 years), we speak of a refined or corrected birth 
rate. The average number of children to a family varies in 
different countries from 3 to 5. In the same country the 
fruitfulness depends not only on color and nationality, as in 
the United States, but also on social and economic conditions, 
according to the sway of prudential considerations. It is a 
notorious fact that the greatest fecundity is found in the poorer 
classes. It is now also well established that birth rates, like 
marriages, differ at present in cities of the same size according 
to the prevailing industry or occupation. The birth rate per 
thousand of the population as a whole ranges from the excep- 
tionally low figure of 22 in France to almost 50 in Russia and 
India. In the United States it is above 35, but falling rapidly 
in the Eastern states. In large parts of New England, in fact, 
the birth rate of native parents is lower than in France, so low 
indeed that were it not for the far greater fecundity of foreign 
parents there would be less births than deaths. 

The increase of population depends, as has just been inti- 
mated, not only upon the birth rate but upon the death rate. 
It makes a great difference to social progress whether a slow 
increase of numbers is due to the one or to the other cause. 
Whatever may be the conclusion as to the desirability of a low 



58 Population. [§ 24 

birth rate, there can be only one opinion as to the undesira- 
bility of a high death rate. In modern times, at least, civ- 
ilization endeavors in every way to arrest mortality and to 
prolong human life. 

It is quite unnecessary to fortify by statistical data the 
familiar fact that deaths vary according to seasons, age and 
sex. In hot countries the summer, and in cold countries the 
winter, are the most dangerous ; in all places infant mortality 
is by far the greatest ; and almost everywhere the male death 
rate slightly exceeds the female. In making comparisons we 
must again observe the distinction between the crude and the 
refined rate. The ordinary basis is the number of deaths per 
thousand of the population. Since, however, the rate varies 
with sex and age, the comparison is accurate only when made as 
between the same proportions of sex and age. A rate reduced 
to such proportions is called the refined or corrected death 
rate. Otherwise a country with a relatively larger number of 
children would have a higher death rate. For general pur- 
poses, however, it has been found that the results of computing 
according to the crude or to the refined death-rate method 
do not differ sufficiently to change the relative standing of 
countries. In the American statistics still further accuracy is 
sought by correcting the death rate for race as well as age dis- 
tribution. Using the crude figures, the normal death rate in 
modern communities now varies from 17 to 21 per thousand, 
the former being the figure for. the United States in 1900. In 
the cities it is considerably higher than in the country, the 
rural rate sometimes being as low as 14 or 15, and the urban 
rate occasionally ascending in unhealthy American cities to 35 
or even 50. The death rate has been markedly reduced in 
recent times by the progress of science in controlling disease, 
by the growing infrequency of war, and by the economic 
changes which have virtually eliminated famine, except in 
relatively backward countries like Russia and India. The 
greatest improvement, however, has taken place in the urban 
death rate, owing to the immense stri les in modern sanitation, 



THOUSANDS ' 

c 
1300 

1200 

1100 

, 1000 

900 

800 " 

700 

600 

500 

400 

300 

300 

100 


1840-41 
1841-43 
1842-43 
1843-44 
1844-45 
1845-46 
1846-47 
1847-48 
1848-49 
1849-50 
1850-51 
1851-52 
1853-53 
1853-54 
1854.55 
1855-56 
1856-57 
1857-68 
1858-59 
1859-60 
1860-61 
1861-62 
1803.63 
1863-64 
1864-65 
1865-66 
1866-67 
1867-68 
1868-69 




















































































































































































































































































































FOREIGN IMMIGRATION TO THE UNITED STATES 
1840-1908. 










































































NUMBER OF IMMIGRANTS 
































NUMBER OF IMMIGRANTS 

TO 10,000 POPULATION 

(To year ending Dec. 31, 1855 figures show alien passengers arrived; 
after year ending Dec. 31, 1855, imnnigrants arrived.) 

NET IMMIGRATION 

after deducting alien departures, o oo oooooooooooo 

(From 1899 to 1907 the figures are official estimates; 
from 1908 the figures are actual.) 

NUMBER OF NET IMMIGRANTS 

TO 10,000 POPULATION +,+.+.++.4.+.++, 














































































































- 




























































































































































































































































































































































































































































































































































































































































































































































































































































































































K 




























































A 






















































. 




( 
























































A 


v». 


J 
































/ 






















J 




































y 
























/ 




































/ 






















/ 


































A 


V 


























































/ 






































































































t 








































"-vj 




















A 
























































I. 


/ 


\ 














J 












































•t 
















y 


















































































} 










• 




-». 


!"»■ 














A 






























/ 






. 












'i 










1 


' > 




i 
























J 




t 


.^^ 


• 


























V 


J 
















*. 


■/ 




\ 


/ 




/ 


















I 




^^ 


















,-•- 


-•• 


-- 


r- 1 












^ 






















•*' 


















^ 










a. 


, 


■»•. 


„_^ 


1 




























\ 




,A, 






V 


-•' 


















































-^ 




'■* 


p^ 













































































YEARS 

OT ■* "5 to 



lO to IN- OO 



1-1 T- 


p 


rn 


rn 


=^ 


nri 


FTT 


-T-n 








^ 


— 1 


— 1 






— 1 


— ] 


-n 










— 1 
























































































































j 
























































/ 






















































J 
























































, 
























































/ 
























































/ 








































































































































































/ 
























































/ 
























































/ 
























































,r^ 


























































n 














































































































/ 


i"' 


































































































































































. 
















































































































, / 
























































V 
























































, \ 
















































































































1 


















i 








































"^ 
















/i 
























































/ \ 
























































/ ' 








































^ 
















' 


, 


































/ 




D 


















\ 


































/ 


? 


<f 


















\ 


































Jf 




' 
















1 


' 


































1 
























































/ 




















/ 


I 


































/ 






















\ 














/ 




















/ 


c 




















\ 






1 


> 




I 






















/ 






















\ 






/ 


\ 




/ 






















/ -> 


CD 




















1 






/ 


\ 




/ 






















1 " 


? 


























,r 


\ 




/ 




















7 


' ' 






























\ 
























/ 


■" 








>, 
























k-- 






















' 










f V 




















i 










'i 
















_■ 








\ 




















' 












I 
























\ 
































\ 
























\ 


















V / 














I 
















p 








\ 


















\' 














\ 










































V 














\ 




/ 










n" 














































/ 








( 
















































/ 






















































s 


/ 














































































































































■ ■■ 
















































































































; 




















































N 




/ 


^' 










































/, 










"^ 




* ^ 








































;' 


A 


.-'; 












r 


'k 








































></, 


V 












/ 








^., 


, 




i 


— < 
























.V*' 


^ 




^ 








i 






> 


^ 


/■ 


\ 


j. 


''^ 




Nr 


















'-;> 


' "v 




^ 




> 


^ 






/ 






















V 






, 






•^ 




x'^ 






+ 






'^ 


'•■I 


--4 


,-•" 
























'"^ 


f 


\ 


-•4 


-'' 


h'* 





































































YEAR 

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 
110 1 1 1 1 \ 1 1 \ 1 1 1 110 



105 
100 
95 
90 
85 
80 
75 
70 

CO 

z 65 
< 

5 60 

I 

^55 

o 

^ 50 
o 

_i 
=! 46 

40 

35 

30 

25 

20 

15 

10 

5 







































/ 




INCREASE OF POPULATION 

IN THE 

UNITED STATES 

AND THE 

PRINCIPAL COUNTRIES OF EUROPE 

FROM 
1800 TO 1900. 










/ 










/ 








/ 










/ 




















/ 














-^ 


' 
















^y 


/ 






/ 












1 

1 
1 

1 








/ 










^^^>' 


1 






p/ 


^ 








^y' 


<^y - 








i 


<2^ 






y 


'' 










4^ 




y 


,/ 










/ 


#" 


..^ 


^.'' 














r. 


^^^* 

*^-- 


^^' 












^/ 


f 0- 


7'"' 


--^- 








3.^0. 


■^'- 




/ \^ 


^^-^ 


■ ^/ 


^...- 


^^^ 


*.ii- ■^■ 


'^ 


.oe^" 





-■-/" 


'1..- 


_\;T 


^■■■■■"^ 






\ 


■>e^" 


^i''^ 


' "/^ 












-^- 


i^"^- — 


.M— — 


^ 


















...^ 


^ 


rURK-E-Y 

H-l— t— n- 

:n and 












*-h-h^^ 


>^^^ 


■-}-+++■ 


gWFD 


NORWA 


Irr-O-OO- 


-^+H-^- 


-***'*' 








o-0-0-0-< 

























105 
100 



75 



70 



65 



60 t^ 
O 



55^ 



1800 1810 1820 1830 1840 1850 I860 1870 1880 1890 1900 

YEAR 

FfoniReports of Twelfth U.S. CensuSj Statistical Atlaa. 



§ 25] Migration of Population. 59 

food and milk inspection, housing improvement and park de- 
velopment. Within a century the death rate of Vienna has 
fallen from 60 to 23 ; within twenty-five years that of London 
from 50 to 25 ; and within half a century that of New York 
from 32 to 20. In fact, selected cities in certain countries 
now shoVv a death rate even lower than in rural districts. 

25. Migration of Population. 

The final factor which affects changes in the population is 
migration. Internal migration from place to place as well as 
from occupation to occupation is the chief manifestation of the 
modern mobility of labor. In former times custom, caste, 
settlement laws and the like interposed serious obstacles to 
such movement. Now, under the pressure of the economic 
motive, population shifts with opportunities of bettering one's 
condition. Migration between countries assumes the form of 
emigration and immigration. While immigration swells the 
population of new countries, emigration only rarely diminishes 
the population of an old country ; for the gap caused by the 
emigrants is soon filled by the results of an increased birth 
rate due to the improved opportunities at home. Ireland is 
for special reasons a striking exception. 

Where people emigrate to places under the control of the 
mother country they form colonies. Colonies, however, are 
not only colonies of occupation, to afford an outlet for surplus 
population, but also colonies of exploitation, to furnish a vent 
for surplus production of commodities. In modern times we 
may even speak of a third kind of colonies like those of the 
United States, where the aim is neither emigration nor exploi- 
tation, but rather the political and economic elevation of the 
indigenous population. 

If we assume with the anthropologists one original habitat 
for the human race, practically all populations are composed 
of immigrants or descendants of immigrants. Formerly 
the migration was one of tribes or nations ; now it is one 
of individuals. In the older civilizations these wholesale 



6o Population. [§ 26 

immigrations even of individuals have long since ceased. In 
countries like the United States, however, the movement is still 
in progress on a gigantic scale, probably for the last time 
in human history. Although the immigration has increased 
largely for the past half-century, it has not grown appreciably 
faster than the native population. The foreign born con- 
stituted 13.2 per cent of the total population in i860; and 
while the proportion rose slightly in the succeeding decade, in 
1900 it was again about the same — 13.7 per cent. This is 
contrary to the current opinion, but is none the less a fact. It 
is clearly shown on the maps and charts opposite pages 58, 
60 and 62, which also illustrate the great increase in recent 
years of immigrants from the South and East of Europe as 
well as the composition of the population in 1900. 

By combining the natural increase with that due to migra- 
tion we arrive at the total increase of population. Up to the 
civil war the population of the United States grew slightly 
more than a third every ten years. Since 1880 the decennial 
rate of increase has diminished, being about 25 per cent for 
the decade ending 1890, and about 21 per cent for that end- 
ing 1900. Notwithstanding this diminution in the rate of 
increase, it is exceeded only by Argentina, where the rate is 
approximately as large as that of America before 1860- In 
Europe the rate of increase is only about one-half of that of the 
United States ; but while it is falling in the United States it is 
rising in Europe. On the chart opposite page 59 will be found 
a statement of the comparative increase of population in some 
of the more important countries during recent decades. 

The excess of births over deaths and the rate of increase in 
a few typical countries for 1900 are given in the table on the 
following page. 

26. The Law of Population. 

The chief problem in the increase of population is its rela- 
tion to prosperity. The so-called law of population, as framed 
by Malthus at the close of the eighteenth century, asserts that 























M. 








^ 








WM 


























r; 
























■ 


































































wm 



















































o 

h- 

o 

in 

00 



^^ 

-J S ^ 

LU I- UJ 

^- z s 
o o 

m 
DC 



9 H 

o o 

d: 1- 

Q. 
c4 



5 26] 



Law of Population. 



6i 



there is a tendency of population to increase faster than the 
means of subsistence, and that this pressure of population on 
food, unless removed by preventive agencies, will lead to the 
positive checks of misery, vice and crime, by which alone the 





Birth 
Rate. 


Death 
Rate. 


Excess of 
Births. 


Per cent of 
Decennial 
Increase. 


Population 

(omitting 

000). 


United States . . 
England and Wales 
Germany .... 

France 

Italy 

Hungary .... 


35-1 

30.1 

36.2 

22.2 

35-5 
40.5 


17.4 
18.4 
22.5 
21.6 

24.6 

30-3 


17.7 
II.7 

137 

0.6 

10.9 

10.2 


20.7 
12. 1 
16.2 

1-7 

7.2 

10.3 


75.994 
32,526 

56,367 
38,590 
32,475 
19.254 



equilibrium will again be restored. Three conclusions were 
drawn from this doctrine, applicable respectively to socialism, 
to wages and to economic progress. 

(i) The first point is the one which originally set Malthus 
thinking. Some of the French idealists and their English 
followers had been advocating equalitarian or communistic 
schemes of social regeneration. Malthus contended that the 
pressure of population on subsistence would effectually pre- 
clude any such ideal consummation. (2) Again, although 
this came somewhat later, it was claimed that wages depend 
upon demand and supply, and that it was therefore hopeless 
for the laborers to expect more than a bare minimum wage 
unless their numbers were checked. (3) Finally, it was as- 
serted that economic progress in general was seriously men- 
aced by the danger of over-population, and it was contended 
that this could be averted only by the extensive application of 
prudence and self-restraint, — remedies in the efficacy of which 
Malthusr himself had not much confidence. 

In the original framing of the principle, Malthus maintained 
that the ratio of increase was at best arithmetical in the case 
of food, but geometrical in the case of population. While the 
accuracy of these ratios has been successfully disputed, it still 



62 Population. [§ 26 

remains a question as to whether population really tends to 
increase faster than food. So far as food is concerned, there 
is no doubt that there Are definite limits to its increase, even 
though these limits are more elastic than were originally 
thought. The area of cultivation may be extended, im- 
provements of all kinds may be applied, hitherto unsuspected 
forces of nature may be utilized ; but in the end, as we shall 
see, the law of diminishing returns, which was not at first 
thought of by Malthus, will make itself felt. 

With reference to population, however, two considerations 
have been advanced to offset the contentions of Malthus, — 
the biological and the socio-economic arguments. The bio- 
logical argument asserts that the power of reproduction itself 
diminishes with more complex and civilized beings, and points 
to the small families of the higher classes and to the increasing 
sterility of the New England women. This argument, however, 
is by no means indisputable ; and it is above all uncertain 
whether the diminishing ratio is natural or artificial, — that is, 
whether or not it is a result of volition. The socio-economic 
argument claims that, as a consequence of general social as 
well as economic reasons, the size of families varies inversely , 
with wealth, and thus keeps down the ratio of increase. With 
the poorest classes every child is regarded as a prospective 
bread-winner, and to that extent not only a help in the near 
future but an additional support for old age. This leads to 
early and often improvident marriages- and large families. In 
the next stratum of society the demands of education and of 
the maintenance of a social position induce more deliberation 
in marriage, and effectively bar the probability of so numerous 
a progeny. Finally, where wealth is abundant, the desire care- 
fully to train a few rather than to half train many children, as 
well as the wish to escape the nervous strain of a numerous 
offspring, conspire to restrict the number of children. The 
French peasant is not so different from the average American 
or European resident of a large city. The economic motive 
may be slightly stronger with the former, the other social 



a: 
O 



cc. 
a: 






OS 



O cc 

— LU 
I- o. 



CL 
O 
Q. 



I- 



o 



z 
O 
O 



! 


n 


1 




I 


1 








r 


1 












1 







1 




1 










- 


1 






— 


1 
















- 


























— 




— 


1 




















- 




1 








_ 
























" 


































_ 




_ 


















~ 




n 






- 
































— 


























- 


- 




































- 


































~ 




- 






































































— 


_ 
































































" 


— 


- 


- 


























































































































































































































































































































































































































































































































































































































































































1 
< 

z 
o 




< 

2 


>- 








d 
o 

X 


UJ 


UJ 
CO 




i 


E 




1 


1 


i 

1 
' < 


1- 










! 
} 


<r 


1 
<■ 

z 
< 

3 


UJ 

X 
CO 

s 




1 


i 
1 





C05C=:>SSZC0"' 

^05^2z5i-ssx 



» 5 



?> J- Q O © 



o 


7- 


CO 


X 


C3 

UJ 


o 


z 

7' 


& 


S 




UJ 


UJ 



a. Z & S 



- 


- 




r 




T" 






- 




■' 


!' 






1 










- 


















- 












































































































- 




- 














































- 




_ 


— 












































— 












— 














































































- 




















_ I 


' 


- 










































— 




























- 


















- 



























— 
























- 


- 


_ 


_ 














































— 


— 




— 








































- 


- 


























































































































































































































i 


J 

o 

t- 


1 1 

< CO 


> 
111 

CO 

u 


< 

z 


1 

z 
< 




i 

CO o 


\ 

<■ 
z 
< 


j 


6i 

1- 

(0 

I 
o 


< 

z 


! 

< 




1 

d 

z 
< 

rii 


z 


i 

1 

< 


J 


< 

CO 


,< 
(«■ 
o 





D 



^ § g 



! ?, 



=; z o 



X 5 i ? " ; S 

g g 5 S w S o 

S -I O 03 S Z S 



5 < 



§ 26] Law of Population. 63 

motives slightly stronger with the latter ; ^ut in essence they 
are alike. Here again, however, the argument is not anti- 
Malthusian ; for the phenomena just described are the results 
of prudential considerations, and really fall under the head of 
the preventive agencies mentioned by Malthus. 

It might seem, then, that Malthus was right in his premises ; 
and since the preventive considerations are proverbially weak 
in the poorer classes, it might be claimed that he was also jus- 
tified in his gloomy forebodings. This conclusion, however, 
does not follow. The real antithesis is proximately at least 
not between population and food, but between population and 
wealth, or productive efficiency. Through a proper organiza- 
tion and utilization of improved methods, production of wealth 
in general may be so augmented as to permit an increase both 
in population and in prosperity. This has happened, for in- 
stance, all through the nineteenth century, even in the older 
countries of Europe ; the industrial revolution has not only 
multiplied national wealth, but has greatly increased popula- 
tion, while reducing misery, vice and crime. It might be 
contended, indeed, that this is exceptional, because the in- 
creased numbers have after all been dependent ultimately 
upon the food supply which they have secured from the newly 
opened areas of North and South America ; and it might be 
added that the population of these countries is increasing 
so rapidly that sooner or later they also will have no surplus 
food to export. Even granting this contention, however, and 
looking forward to the distant time when all the huge and now 
uncultivated areas of the earth's surface will be utilized for 
food production, it still remains true that the increase of 
wealth may for almost indefinite periods keep ahead of popu- 
lation. For, as was intimated in the last chapter, a really 
intensive capitalistic system of agricultural production has 
never yet been attempted on a large scale. If there is enough ^ 
wealth to put into the soil, it can be transmuted into food. 
The diminishing returns from land can be arrested by the in- ^ 
creasing returns of a rapidly augmenting efficiency of industry 



04 Population. [§ 26 

in general. The food may indeed cost more, but there will 
be more wealth with which to buy it. 

Not only can wealth be made to increase faster, but, as we 
have seen, the increase of wealth will in itself set in motion 
those economic and sociological forces which tend to reduce 
the rate of increase of population. Thus from both sides the 
antithesis of wealth and population may be weakened. Under 
favorable conditions population may increase gradually, and 
wealth rapidly. 

It is clear, however, that these favorable conditions include 
those of distribution as well as production. The communists 
against whom Malthus wrote were mistaken, but not for the 
reason alleged by him. They thought that a mere change in 
the distribution of wealth would suffice to bring prosperity. 
They failed, just as the socialists of to-day still fail, to realize 
that even an ideal distribution is valueless without enough to 
divide, and that their schemes would dangerously impair pro- 
ductive efficiency. On the other hand, the wages-fund doc- 
trine of the English classical economists erred, as we shall 
learn, chiefly in that it overlooked the connection between 
wages and production, and took no account of the fact that, 
given a greater productive efficiency, more workmen and 
higher wages are perfectly compatible. 

The problem of population as a whole is, then, not one of 
mere size, but of efficient production and equitable distribution. 
That is, it is a problem not of numbers alone but of wealth. 
Since man is the chief labor force, large numbers indeed, 
other things being equal, mean greater national strength and 
power. But the reverse may be true if other things are not 
equal. A small nation with greater productive efficiency, like 
England, will outrank a more populous country, like India. 
Smaller numbers with a fairly equable distribution of wealth 
are preferable to a dense population living in the extremes of 
misery and opulence. Mere numbers are therefore not the 
vital point. The world has alternated in its opinion and action. 
In classic antiquity, where the absence of advanced industrial 



§ 26] Law of Population. 65 

methods soon set a limit to production, over-population was a 
real danger, tempered first by emigration and then by infanti- 
cide. In the middle ages population was sparse, and yet, 
because of undeveloped production, kept down by famine and 
disease. With the growth of enterprise in the fifteenth and 
sixteenth centuries, increase of population was favored but not 
always secured. The conditions at the close of the eighteenth 
century seemed to lend color to the fears of Malthus ; but for 
well-nigh a century the concern in the advanced industrial 
countries has been not of an unduly rapid but of an unduly 
slow increase of population, until in France to-day it has 
become a problem not of excessive fecundity but of race 
suicide. 

The doctrine of over-population has therefore lost its ter- 
rors for modern society. The stress has been shifted from 
food to wealth and efficiency. Productive efficiency, however, 
depends not only upon character and education, intellectual, 
industrial and ethical, but also upon social organization and 
economic methods. The problem of population, in short, is 
to-day a part of the broader problem of the production and 
distribution of wealth. In this sense it is a result rather than 
a cause. If we increase productive efficiency and secure an 
approach to distributive justice, population will adjust itself to 
the new conditions either by increasing automatically up to the 
level of comfortable subsistence or by being voluntarily kept 
down to that level. 



66 Economic Stages. [§ 28 



Book II. 
Development of Economic Life and Thought. 



CHAPTER V. 
THE ECONOMIC STAGES. 

27. References. 

C. Bucher, Ijtdustrial Evolution (trans, by Wickett, 1901), chs. i-iii ; 
R. T. Ely, Studies in the Evohttion of Industrial Society (1903), part i, ch. 
iii; W. J. Ashley, English Economic History (2 vols., 1888-1893), passim ; 
E. Jenks, History of Politics (1900), Types i, ii; W. Cunningham, Growth 
of English Industry (3 vols., 4th ed., 190 5-1907), and Western Civili- 
zation (1900), passim; J. A. Hobson, Evolution of Modern CapitalisDi 
(2d ed., 1906), ch. ii; E. J. Simcox, Primitive Civilizations (1897) ; O. F. 
Peschel, Races of Mankind (1876); F. Ratzel, History of Mankind (3 
vols., 1896-1898) ; J. Lubbock, Races qf Man (1888) ; and Origin of Civ- 
ilization (1870); L. H. Morgan, Ancient Society (1878); A. H. Keane, 
Man, Past and Present (1899) ; Spencer and Gillen, Native Tribes of 
Central Australia (1899), and Northern Tribes of Central Atcsiralia ( 1904) ; 
A. W. Howitt, Native Tribes of South East Atistralia (1904) ; O. T. Mason, 
Origin of Invention (Smithsonian Institution, Publications, 1895) ; P. G. H. 
Grierson, The Silent Trade (1903) ; A. Loria, Economic Foundations of 
Society (trans, by Keasbey, 1899) ; G. SchmoUer, The Mercantile System 
(trans, by Ashley, 1896) ; H. de B. Gibbins, Industry in England {iZoi"]) ; 
T. Warner, Landmarks in English Industrial History (1899). 

28. Economic Development. 

Inasmuch as economic life is many-sided, it is not easy to 
single out the fundamental characteristics of its development. 
Most of the current explanations err in one of three ways : 



§ 28] Economic Development. 67 

some mistake the accident for the essence ; some are so in- 
complete as to be of little real use ; some are so general as to 
be either vague or inadequate. 

(i) Of the first class a good example is the division into the 
three periods of barter, money and credit economy. In the 
first period men exchanged their superfluities through the me- 
dium of barter alone ; in the second period money was in- 
vented to facilitate trade ; in the third, credit was devised to 
supplement the money supply. All this is true enough, but 
does not go sufficiently deep. It does not show which is cause 
and which is effect. It does not tell us why these transitions 
occurred, nor explain the basic changes in the industrial organ- 
ization of which these transitions are only the outward forms. 
Of much the same character is the division of economic life 
into the three stages of the animal, the vegetable and the 
mineral economy. In the first period, we are told, men lived 
primarily on the results of the chase ; in the second, on the 
fruits of the earth ; while, in the third, science is continually 
expanding the scope of chemical substitutes for animal and 
vegetable food. It is obvious that even if this statement 
were correct, it would not make clear the fundamental facts 
of economic organization. 

(2) The second class of explanations comprises all kinds of 
half-truths or statements which while true in themselves are in- 
complete. In this category belong Maine's famous law that 
the world has progressed from a condition of status to one of 
contract, and Spencer's law of the evolution from militant to 
industrial society. Of a like nature is the assertion that the 
world has gone through the stages of slavery, serfdom and 
free labor ; or that it has advanced from common to private 
property, or from bimetallism to monometallism, or from cus- 
tom to competition. All such statements may be true and 
even serviceable within a limited field, but for the purpose 
of disclosing the real inwardness of general economic progress 
they are of minor importance. 

(3) The most conspicuous illustration of the third class of 



68 Economic Stages. [§ 29 

explanations is the venerable classification into the five stages, 
— the hunting, the pastoral, the agricultural, the commercial 
and the industrial stage. This description, however, is both 
inaccurate and vague. Not only is hunting not the first stage, 
but the sequence of the stages is not necessarily the one men- 
tioned. Moreover, the generalization is too broad to afford 
much help in the explanation of modern conditions. Rome is 
supposed to have gone through these stages, and yet the later 
Roman civilization differed in fundamental economic respects 
from our own. A version of economic history which would 
throw imperial Rome and modern England into the same 
category is manifestly too broad to be serviceable. Of a 
similar character is the division of economic life into the stone, 
the bronze, the iron and the steel age. The iron age covers 
so many heterogeneous forms of economic civilization that the 
classification is useful chiefly for archaeological purposes. 

Before proceeding, however, to give the more modern ex- 
planation of economic progress, it may be wise to dwell for a 
moment on the last two classifications which, when correctly 
put, still possess a certain use for the early periods of society. 

29. Primitive Technique. 

(i) At the outset and for a long time, man, like his simian 
ancestor, lived on wild berries, nuts, roots and herbs. He 
roamed about, as do some of the Australasians to-day, in small 
groups of twenty to fifty, in alternating periods of plenty and 
want, according to the season or the fortunes of the weather. 
Each group was for the purposes of the food supply entirely 
independent. Primitive man, however, as the physical confor- 
mation of his teeth and jaws shows, was not only herbivorous 
but carnivorous. When geographical reasons favored, he varied 
his diet by fishing, and in many cases he practised cannibalism, 
not only on his enemies, but also on the old and useless mem- 
bers of his own social group. 

(2) The root-grubbing period was, we shall not say suc- 
ceeded, but rather supplemented, by the hunting stage in 



§ 29] Primitive Technique. 69 

certain portions of the world where game was abundant. This, 
however, presupposes a certain technical development. Man 
is distinguished from his prey primarily by the use of weapons 
and tools. The history of civilization is very largely the his- 
tory of technique. There was at first no distinction between 
weapons and tools. The weapon was the only tool for both 
defence and offence. The earliest weapons consisted of objects 
ready at hand, — wooden sticks, animal bones, tusks and teeth, 
pieces of stone. 

(3) The combination of these was one of the great steps in 
advance. It changed the primitive club or missile into a 
moderately effective weapon. The affixing of a flint to a stick, 
or the fastening of jagged teeth to pieces of wood by wisps 
of grass or strips of hide or catgut were the first triumph of 
human ingenuity. The bone and the stone age lasted for 
countless generations. In the course of time implements were 
found serviceable not only for warfare but for the saving of 
toil ; in other words, by the side of the weapon we find the 
tool. In this transition perhaps the mightiest factor was the 
utilization of fire. What was a terror to brute creation became 
a servant to man. Originally obtained from a chance con- 
flagration, the spark of fire was zealously guarded, and was 
soon invested with sacred attributes. In some cases it even 
became the basis of the religion itself. Although we find 
savage races to-day who understand the secret of creating fire 
by friction, the easier method was to ignite the brand from 
the ever-burning flame. The chief function of the vestal 
virgins in Rome was to keep the perpetual fire ; and in the 
Catholic church to-day with its never-extinguished light we 
have the last survival of what was once a fundamental social 
custom.^ 

(4) Fire was utilized not only for purposes of warmth, but 

1 The testimony given before the New York gas commission in 
1905 affords another curious illustration of the survival of this custom. 
One of the officials stated that whenever the location of the gas works 
is changed, the fire is transferred by a brand from the old to the new 
building. Under no consideration would a new fire be started. 



JO Economic Stages. [§ 29 

also for the better preparation and conservation of food, thus 
making man less dependent on his immediate surroundings. 
From that time on, although environment still makes the man, 
man to an ever- increasing degree succeeds in changing the 
environment. The most signal service of fire, however, was 
in the improvement of tools. Its uses became most marked 
when metals were employed. Even the tools of wood and 
stone, however, were greatly improved thereby. So slow was 
the development that it took countless centuries for the old 
stone or paleeolithic age to change into the new stone or neo- 
lithic age. We find flint weapons at least 100,000 years old. 
JJuring this transition man had learned to rub, to sharpen, to 
bore, to cut, to plane and to polish the bones and stones so as 
to produce arrows, knives, javelins, hammers, millstones, 
daggers and saws. In all this he was simply imitating the ex- 
perience of parts of his own body : in the saw we have the im- 
proved tooth, in the hammer the strengthened fist, in the 
scoop the enlarged hollow of the hand, in the hook the crooked 
finger, in the javelin the lengthened arm, in the knife the 
sharpened nail. Hand in hand with this went the invention 
of the earliest utensils. From the animal's horn to the beaker, 
from the hollowed wood to the osier basket, from the natural 
gourd to the artificial jug, does not seem so great a step. Yet 
the invention of pottery has been deemed by some so im- 
portant as to constitute a revolution in human civilization. 
Weapons, tools, utensils, — these typify the onward march of 
the human race ; they are the outward technical manifesta- 
tion of man's intellectual progress and the physical basis of his 
economic development. 

(5) From the purely technical point of view the stone age 
was succeeded by that of metal. Without the use of fire for 
smelting this would of course have been impossible. Archae- 
ologists not so long ago thought that the copper and bronze 
ages everywhere preceded that of iron. This can, however, 
be accepted only with qualifications. It now seems probable 
that the rougher forms of iron were utilized before bronze was 



§ 3o] Transition. 71 

invented. In certain countries we find no bronze age at all, 
because of the lack of one or both of the constituent compo- 
nents, tin and copper. In the civilizations that grew up about 
the Mediterranean, however, first copper and then bronze 
drove out the primitive and rougher iron implements, until 
after several centuries the improved extractive processes 
assured the final victory to the finer iron tools and thus insti- 
tuted the true iron age. With the advent of this, man's 
mastery over nature was definitely assured. 

30. Transition from the Lower Stages of Civilization. 

It is obvious that metallic weapons and implements would 
be of the greatest service to both hunters and fishers, and in 
truth we find some of the more advanced hunting civilizations 
acquainted with the use of rougher iron. But the continuance 
of the hunting stage, as well as the character of its transition 
to a subsequent stage, depends not so much upon the kind of 
weapon as upon the conditions of nature and the relations of 
population to the land. Under certain circumstances where 
game began to become scarce, it was discovered, at first by 
mere accident, that a less precarious food supply could be 
secured by preserving various animals and caring for their 
increase, rather than by devouring at once the entire product 
of the chase. The domestication of animals was a discovery 
of momentous import, and with their multiplication first for 
food, then for transport, and finally for clothing, protection and 
pleasure, we have the conditions for the transition to the pas- 
toral stage. Although this is often called the nomadic stage 
because of the perpetual shifting of the community in quest of 
fresh pasture, the term is badly chosen, because there is on 
the whole less nomadism than in the hunting age. The chief 
result of the domestication of animals was the assurance of a 
permanent, even though an artificial, food supply, or at all 
events one that depended on the foresight and care of man. 
Cannibalism disappeared and famines became less frequent. 
Another consequence was the possibility of supporting a larger 



72 Economic Stages. [§ 30 

populatioi, on the same area. Finally, thp permanent posses- 
sion of cattle became an object of desire, and private property 
developed on a large scale, with corresponding differences of 
wealth and of social classes. 

It is, however, erroneous to assume that the hunter was nec- 
essarily succeeded by the herdsman. In the first place animals 
capable of domestication were not found everywhere. On the 
American continent no pastoral life was possible with the llama 
alone. Secondly, whole stretches of land, both in Africa and 
in Asia, were unsuitable for grazing purposes. It is only where 
all the geographical and climatic conditions were favorable, as 
on the great Asiatic and North African plains, that we find the 
transition to the pastoral age. 

In the same way it is erroneous to think that the herdsman 
was everywhere succeeded by the farmer. A certain degree 
of agriculture is often found combined with the hunting or 
fishing stage. In fact, it is only a small step from the original 
root-grubbing to primitive agriculture. When, again presum- 
ably by accident, it was found that the seeds would multiply 
themselves, and that the stick was more effective for grubbing 
than the finger, we have the beginning of the cultivation of 
the soil. Just as human foresight led men under certain con- 
ditions to preserve animals in order to secure an increase, the 
same quality led them under other conditions to preserve 
plants. If flock tending is a result of the domestication of 
wild animals, agriculture is a result of the domestication of 
wild plants. Because of the temporary patch near the hunter's 
tent, some, like Morgan, call this system horticulture ; because 
of the primitive tools, others call it hoe culture. Both terms 
are unfortunate, the one because horticulture (/. e. garden 
culture) at present signifies a very developed form of tilling 
the soil ; the other, because the hoe has even to-day been by 
no means completely superseded by the plough. 

What is reasonably sure is that the primitive tilling of the 
soil was carried on by the hunters' wives and daughters as a 
subordinate and auxiliary means of support. It was only at 



§ 3o] Transition. 73 

a much later period that agriculture acquired more importance, 
and it was not until the game supply had been practically ex- 
hausted that the chief reliance was put on agriculture, and the 
roving life of the hunter gave way to the settled habitation of 
the farmer. These periods in agriculture may exist, moreover, 
in connection not only with the hunting stage, but also with 
the pastoral stage. In fact, the most careful investigators now 
believe that the domestication of animals was not an achieve- 
ment of the hunter at all, but of the primitive farmer, and that 
the pastoral life was an outgrowth of early agriculture. Without 
a knowledge of all the details, therefore, it is impossible to 
assert the exact chronological sequence of the stages. 

Much the same may be said of the transition to the later 
stages of commerce and industry. The commercial stage does 
not necessarily follow the agricultural stage, but often precedes 
it. In the case of many coast peoples, the fishing and commer- 
cial stages appear at the same time, without the intervention of 
agriculture. And in more developed civilizations, like that 
of Venice, for instance, we find the pastoral stage develop at 
once into the commercial stage without reaching the industrial 
stage. 

The time-honored classification of economic progress is thus 
not only inexact in itself, but of comparatively little service in 
explaining the great changes that have supervened since the 
adoption of agriculture. For this purpose a somewhat dif- 
ferent line of cleavage seems desirable. 

If we regard economic conditions from the standpoint of the 
relations of production to consumption — for these are the fun- 
damental economic facts — we may divide the world's history 
into three great stages, known respectively as the self-sufficing 
economy, the trade or commercial economy and the capitalist 
or industrial economy. From another point of view these may 
also be called the isolated economy, the local or village econ- 
omy and the national economy. These we shall now proceed 
to consider. 



74 Economic Stages. [§ 31 

31. Self-sufficing or Isolated Economy. 

By this term is meant a form of organization where the 
economic unit or household produces everything that it needs 
and consumes all that it produces. In its typical form the 
household raises the raw materials for food and for clothing, 
provides its own shelter and works up into finished products 
everything necessary for its final consumption. What little 
division of labor exists takes place within the household, and 
grows only with the expansion of the household's needs. 
Whether the household is small or large, however,- it is always 
a unit by itself; it has normally no necessary relations with 
any other unit. Its economic characteristic is its self-sufifi-' 
ciency and therefore its isolation. 

This self-sufficing economy assumes many different aspects 
in the course of history. The economic unit may be either 
a family or a larger group. It may rest either on slave labor 
or on free labor. It is the universal form of the beginnings 
of society, in the root-grubbing or hunting stages, and is always 
found ' in the early periods of the pastoral and agricultural 
stages. It is seen in the frontier life of more advanced com- 
munities, for the family of the backwoodsman in the United 
States is in this respect like the earliest groups known to his- 
tory. It is found in Greece, where the landed estate was 
called the oikos. It is typified in the 'R.oma.n famiHa, which 
is the name for the entire possessions of the Roman citizen, 
including his wife, his children, his slaves, his land and all his 
other belongings. It is represented in the manor of mediaeval 
Europe and in the plantation of the American slaveholder. It 
is found even to-day in the Russian mir, or village community, 
and in some of the Danubian principalities. 

Everywhere the distinguishing mark is the self-sufficiency, 
or home production and home consumption, of the economic 
unit. It is not a question of slavery, for we find the same 
economic form in the mediaeval manor resting on serfdom, 
and in the primitive or still surviving community of freemen. 



§ 3i] Isolated Economy. y^ 

It is not a question of autocratic power, for we find it equally 
in the democratic Russian mtr and the aristocratic American 
plantation. However different the forms, the essence is the 
same. The landlord, whether a single person or a group, is 
the property lord. The estate forms a complex whole. Pro- 
duction is carried on by the group, and there is no sharp line 
between producers and consumers. The wants of the group 
members are satisfied by their own labor, and not by that of 
some other economic unit. As consumers they are no less 
independent than as producers. 

In the course of time, indeed, the households that possess 
natural or acquired advantages in the production of certain 
commodities learn to raise a surplus, and trade it off to other 
groups for various purposes, — at first propitiatory in character, 
but later in the expectation of securing similar advantages in 
return. In this way barter develops. But at the outset, and for 
a long time, there is no barter, because in a typical, self- sufficing 
economy there is no need of barter. In fact, the exchange of 
commodities seems wrong because it is unnatural. The pro- 
pensity to *' truck," which Adam Smith considered natural to 
man, is in reality the outcome of a long evolution. To truck 
is etymologically to trick, just as barter in its original form 
(old French bareter') means to cheat.^ Even when exchanges 
develop, the transactions are always attended by rigid formali- 
ties, often invested with a religious sanction. 

The fact of exchange between the groups does not neces- 
sarily alter the organization of economic life, as long as the 
great mass of commodities are produced and consumed at home. 
Thus, for instance, we find in the later centuries of Greek life 
that many of the estates produced raw materials, and sometimes 
luxuries, to be sold in the cities which enjoyed an active com- 
mercial life. So in Rome during the period of its greatest pros- 
perity, the large estates devoted themselves to some one product, 

^ This meaning has survived in our "barrator," although by a curious 
development it is now confined to the deceitful shipmaster, or to the 
cheating and meddlesome instigator of litigation. 



•76 Economic Stages. [§ 32 

like wine or oil or wheat for export, which was carried on by 
large trading companies. So, again, in the American plantation 
a single commodity, like tobacco or cotton or sugar, raised for 
export and handled in the towns, generally constituted the very 
foundation of its success. It is still true, however, that even 
in these cases the great mass of commodities used at home 
was produced at home. While there was trade between the 
units, there was little if any trade within the units, and while 
exchanges in the bulk even as between the units amounted to 
a large sum, they played a small role in the daily hfe of each 
household. Just as the plantation and not the towns gave the 
imprint to the civilization of the South, so the mir and not the 
cities typify the Russian economic life, so the estates and not 
the commercial companies shaped the history of republican 
Rome. In its essence the economic unit was still predomi- 
nantly self-sufficing. Even where there is a surplus produc- 
tion for the market, the consumers within the group are in 
an overwhelming degree dependent on the exertions of the 
group. 

With the growth of commercial intercourse both within and 
between those early economic groups, the self-sufficing char- 
acter of the unit begins to disappear, and there is gradually 
ushered in the next stage of economic hfe. 

32. Trade or Commercial Economy. 

The characteristic feature of this stage is the fact that pro- 
duction is no longer followed directly by consumption, but that 
there is interposed the process of exchange. The demand of 
consumers is now met primarily through the medium of trade or 
commerce. The significance of trade does not arise from the 
fact that there is trade between the units, for, as we have just 
seen, such trade is found in the later stages of the isolated or 
household economy. But we now have trade within the unit. 
The members of the household no longer, as before, produce 
what they need, but primarily produce what others need. W^e 
now have separate classes of producers and separate classes 



§ 32] Commercial Economy. 77 

of consumers. Men for the most part no longer consume their 
own products, but the products of others which they secure 
through trade. In other words, instead of the self-sufficing 
economy we have the trade or commercial economy. 

The unit of economic life, although broader than before, 
still remains local in character, and the trade and industry are 
largely centred in the villages. Hence we also speak of it as 
the local or village economy. We can study this stage most 
clearly in mediseval history. The eleventh and twelfth cen- 
turies witnessed an immense impetus given to commerce, due 
chiefly to the opening of new routes by the Crusades. The 
markets and fairs which had begun on a small scale in the pre- 
ceding centuries now became the rule, and soon assumed a 
more permanent form in the shape of villages and towns. The 
mediaeval town was shut off from its neighbors not only by the 
actual wall of stone and mortar, but by the no less important 
economic barrier of trade monopoly ; only the townsman, the 
burgess, might freely buy or sell ; only he was admitted to the 
many trade privileges. On the basis of this economic separa- 
tion was built up the political independence which is so marked 
a characteristic of early communal life. Although we call 
it the village economy, it is evident that the economic unit 
was not the village or town itself, but the village with the 
outlying territory. The lands or estates provided the raw 
materials which were worked up into finished products within 
the town. 

The breaking up of the older unit, moreover, enhanced the 
importance of industry. In the preceding stage industry was 
scarcely differentiated from agriculture. The farmer was his 
own carpenter, the farmer's wife did the haying and made the 
family clothes. Even where the estates became so large that 
there were separate classes of industrial workers, they were all 
under the control of the landowner. Now, however, the 
village workmen began to form an independent class, even 
though many of the workmen might have a little garden patch 
of their own. The point is that they no longer raised the raw 



yS Economic Stages. [§ 32 

material for industry, but bought it. The farmers grew the 
material, the village artisans turned out the product and each 
class progressed by trading with the other. 

The new industry was based on trade in another sense. 
The artisan not only bought the raw material in small quan- 
tities, but sold in his shop or in his booth at the fair the 
products which he himself had finished. The workman was 
primarily a trader, and his success depended as much on his 
shrewdness in trade as on his skill in industry. It was only 
by degrees that the artisans pure and simple became a sep- 
arate class and that trade was carried on by the large mer- 
chants. For a long time business was chiefly of a retail 
character conducted in the local markets and fairs, and even 
when the scale of transactions in a few staple articles reached 
the stage of wholesale trade, the modern machinery of com- 
merce was entirely lacking. 

The increasing importance of the trader and the workman was 
the chief cause of the growing sense of liberty and equality ; 
the mediaeval town was the birthplace of modern democracy. 
It took a long time, however, for industry and trade to attain 
a dominant position. After some temporary victories in Italy, 
the trade centres won their first lasting triumph in the Low 
Countries, and it is accordingly there that we find the earliest 
example of modern republics on a large scale. 

In the later development of this economic stage there were 
indeed great accumulations of wealth gained in commerce or 
wholesale trade side by side with the wealth in land. We have 
not only the feudal landlords but the merchant princes. If we 
choose to apply the modern term capital to such accumula- 
tions, we find agricultural capital and commercial capital, but 
with rare exceptions no industrial capital. The wealth drawn 
from the land was under prevailing conditions not again put 
into the land, but consumed by the landowners ; the wealth 
accumulated in trade could not go on indefinitely multiplying 
ships and vans without increasing the commodities to be trans- 
ported ; but since these commodities were produced by hand, 



§ 32] Commercial Economy. 79 

the increase was slow. In last analysis, therefore, the economic 
civilization of this stage rested upon the petty village industry. 
Commercial prosperity and agricultural wealth were still as- 
sociated with the prevalence of the small workman and the 
village economy. 

This stage, it is true, assumes different phases. In some 
places agricultural prosperity predominated and the landowner 
was supreme ; in others, like the Hansa towns, we find busy 
marts of wholesale trade, and the predominance of the aristo- 
cratic commercial families ; in still others we find tl:ie centres 
of manufacture and the political mastery of the craft guilds. 
In all cases, however, we have the typical characteristics, — the 
small trader, the petty workman and the local economy. The 
large landowner sold his produce in the neighboring village 
market and drew thence his articles of consumption, outside 
of simple food. The merchant prince may have traded with 
distant lands, but the great bulk of the transactions was local, 
and the business of the national and international fairs was 
restricted to comparatively few articles. Most of what the 
workman produced was made to order for the local market. 
The village or town was the unit ; the foreigner was the man 
who came from a different town, not necessarily from a different 
country. 

This stage of economic life lasted in Europe for several 
centuries. Various causes conspired first to modify and finally 
to destroy it. The chief factor was undoubtedly the accumu- 
lation of wealth caused by the discovery of the new world 
and the opening up of the all-sea trade routes to the East. 
The discovery of immense sums of precious metal in America 
and the prodigious impetus given to commerce both East and 
West produced a heaping up of riches which were now applied 
on a large scale to further production in industry, and which 
gradually changed the character of all economic life. This 
accumulation of wealth, applied to industry, formed what came 
to be known as industrial capital, and there was thus ushered 
in the third stage. 



8o Economic Stages. [§ 33 

33. Capitalist or Industrial Economy. 

The characteristic feature of this stage is the appearance of 
capital on a large scale, applied in industry. With capital, 
there naturally came the capitalist, the owner of the capital, 
the employer of labor force and the director of industrial 
enterprise. In the isolated stage we noticed a unity pervading 
the whole economic process ; in the local and handicraft stage 
we saw that the unity was confined to production ; in the capi- 
talist stage production itself is split up. At first, as in seven- 
teenth and early eighteenth-century England, the capitalist 
makes his appearance at the beginning or end of the productive 
process : he buys the raw material at wholesale, or perhaps 
even disposes of the finished product at wholesale, leaving the 
remainder of the process in the hands of the independent 
workman. Somewhat later the capitalist acquires the working 
premises and finally the technical means of production. The 
workshop becomes the factory, the tools are replaced by 
machines, and the workman becomes the factory hand. In 
the meantime the various parts cf the process become so 
important that each separate stage tails into the hands of 
distinct groups of capitalists, each of them resting on the 
fundamental class of factory owners. Thus the supply of raw 
material, the provision of plant and factory, as well as the 
getting of the finished product to the consumer, call into 
existence distinct classes of capitalists for each step in the 
process. Finally the power of capital becomes so enormous 
that in some industries we find a movement toward integration, 
and the same capitalists, now associated into a single group, 
gradually acquire control of the entire process, from the ex- 
traction of the raw material to the ultimate disposition of the 
finished product to the consumer. Thus industrial society 
comes to be organized on its present complicated basis. 

Production is now no longer to order in small quantities, as 
in the previous economic stage, but large stocks are accumulated 
to be disposed of when the market is favorable, or large plants 



§ 33] Industrial Economy. 8 1 

are erected to fill anticipated large orders. The leisurely 
methods of the old system, regulated more or less by custom, 
give way to an intense competition which makes itself felt in 
every nook and corner of industrial society. The last vestige 
of barter transaction disappears, and money everywhere forms 
the link between exchanges. Credit outgrows its primitive 
forms of mere personal assistance and becomes an integral part 
of production and exchange. The desire to employ capital 
lucratively leads to the attempt to economize labor force, and 
bruigs about the invention of new machinery. The prodigious 
cheapening of production converts luxuries into necessities 
and widens the consuming power of the people. The multi- 
plication of wants brings new industries into existence, and 
finally gives more employment at increasing wages to the laborer. 
At the same time the enormous power of capital and the 
separation of society into industrial classes create new and 
difficult problems. 

An important result of the capitalist stage is the supplanting 
of the local unit by the nation. Production and consumption 
no longer take place within the local boundaries, but what is 
produced in one district is often consumed in another. The 
local economy broadens into a national economy. The larger 
economic interests now require protection through the forma- 
tion of broader and stronger political units. Thus the petty 
feudal principalities disappear and the modern national states 
are born. Town is no longer arrayed against town, the free- 
man or burgess gives way to the citizen of the state ; the 
foreigner is now the man from a different nation, not from a 
different village. In the early stages of capitalistic develop- 
ment the nations oppose each other as the towns had previ- 
ously done, and this keen national competition leads to much 
good, although not unmixed with evil. 

More recently still, the further application of capitalist meth- 
ods, the improvements in transportation and communication, 
coupled with the growth of modern speculation, tend to pro- 
duce a world market for most products, and the perturbatjona 

6 



82 Economic Stages. [§ 33 

of trade are quickly transmitted from country to country. We 
niigtit thus even be tempted to speak of an international 
rather than a national economy. But although the signs are 
not wanting that the ultimate outcome will be the creation of 
such a world economy, it must not be overlooked that the 
economic unit to-day is still the nation, and that the national 
standpoint is being only slowly transformed by universal or 
international considerations. 

The capitalist stage is also called the industrial stage, because 
industry in the narrower sense is the chief occupation. In 
the first stage agriculture was the well-nigh exclusive form, in 
the second stage prosperity rested largely on trade, in this 
stage agriculture and trade alike step into the background. 
All products of course still come ultimately from the soil ; but 
an ever-increasing quantity of wealth consists of products 
several degrees removed from the soil. Production of wealth 
to-day means more and more the creation of finished products. 
Commerce, again, is still of great importance ; but commerce 
is now primarily the handmaid to industry rather than to agri- 
culture. Not only has the moneyed interest appeared as a rival 
of the landed interest, but the moneyed interest itself has 
become intimately bound up with industry. The great fortunes 
are gained to-day not in agriculture, nor even in commerce, but 
in industry. The typical rich man in the first economic stage 
is represented by the feudal landlord or the plantation owner ; 
in the second stage by the merchant princes, such as the Medici 
and the Fugger ; in the third stage by the Carnegies and the 
Rockefellers. Agriculture and commerce have been trans- 
formed by the application of capital and of machine methods. 
The most prosperous condition and the widest diffusion of 
power, of culture and of civilization are found in industrial 
rather than in agricultural nations. 

Some countries, like China, were not touched by this move- 
mfeut, because of the policy of commercial exclusion. So that 
Chiila is still in the village economy stage. Other countries, 
ltk'i6"J'apan, were brought into the new movement but a few 



^33] Industrial Economy. 83 

decades ago, and are now in a process of rapid transition. 
Still other places, like some of the backward sections of 
Europe and America, lag behind in the movement. In classic 
antiquity, as we have seen, the second stage was not reached 
for a long time. Even, however, where commerce developed 
on a large scale and the civic centres flourished, industry was 
still of a petty, handicraft character, and the existence of 
slavery coupled with the absence of any such revolution in 
the world's trade as occurred at the close of the middle ages 
prevented both Greece and Rome from entering upon the 
later stages of the capitalistic era. Capital in classic antiquity 
was primarily commercial capital ; capital in modern times is 
predominantly industrial capital. 



CHAPTER VI. 
THE HISTORICAL FORMS OF BUSINESS ENTERPRISE. 

34. References. 

C. Biicher, Industrial Evolution (1901), ch. iv ; Ashley and Cunningham 
(as in § 27) ; T. Veblen, Theory of Business Enterprise (1904), chs. ii, iii ; 
J. A. Hobson, Evolution of Modern Capitalism (1906), chs. iii, iv ; G. E. 
Howard, History of Matrimonial Institutions (3 vols , 1904), I, chs. i-iv ; 
H. S. Maine, Ancient Law (1880), ch. ix; and Early History of Institu- 
tions (1880), ch. iii; C. Gross, The Gild Merchant (1890) ; A. S. Greeh, 
Town Life in the Fifteenth Century (1895) ; W. A. S. Hewins, English 
Trade and Finance chiefly in the Seventeenth Century (1892) ; A. Toynbee, 
The Ittdustrial Revolution (1884) ; G. Unwin, Industrial Organization in 
the Sixteejith and Seventeenth Centuries (1904); Cooke-Taylor, The 
Modern Factory System (1891) ; S. J. Chapman, The Lancashire Cotton 
Industry (1904). 

35. Primitive Economic Activity — The Clan. 

Business originally meant the " being busy " for a mere live- 
lihood ; it now means being busy for profit. In the same way 
business enterprise originally denoted any organized form of 
economic activity ; it has now come to involve the idea of 
making a profit or securing a surplus. " Enterprise " is the 
Romanic form of the Teutonic " undertaking." When we 
undertake to secure any form of wealth, we have economic 
activity ; when we undertake to secure profits through some 
organized activity, we have an undertaking or enterprise. 

With the immense growth of such activities in modern times 
increased importance is attached to the organizer. Not so 
long ago we called the head of the undertaking the " under- 
taker " ; nowadays with the restriction of the term to a par- 
ticular class of undertakings we have come to call him the 
head of the enterprise, or the entrepreneur. 



§ 35] The Clan. 85 

The earliest kinds of business undertakings are outgrowths 
of the family. The family itself, however, is the result of a 
long evolution. We have seen that our savage ancestors 
roamed about in small hordes or packs of a few dozen individ- 
uals, the numbers being dependent chiefly on the possibility of 
securing available food supplies from the berries and nuts, the 
chase and the waters. After the breakdown of the original 
monopoly of sexual relations on the ])art of the leader of the 
pack, the ensuing promiscuous methods of pairing gradually 
gave way to more or less permanent forms of marriage, in 
which kinship was counted through the mother. For amid 
such conditions of group, rather than individual, marriage re- 
lations it was indeed a wise child who knew its own father. 
These consanguine groups or collections of hordes which we 
meet almost everywhere at the dawn of history are known as 
clans (or, to use the Roman term, genres), and, from the fact 
that their members usually trace their kinship through the 
mother, are called uterine or maternal clans. In some cases 
where the primitive agriculture or hoe-culture carried on by 
the women assumed great proportions, or where we find an in- 
creasing significance attached to the domestic arts, like weaving 
and baking, the social importance of the female was reinforced 
by still stronger economic reasons, and we encounter a system 
of society known as the matriarchate, — the government by 
women. While the matriarchal system, however, is occasional, 
the maternal society based on the uterine clan is well-nigh 
universal. 

Of the characteristics of this early gentile or clan society 
there is room to say only a few words. Of a family in the 
modern sense there was no trace, further than the temporary 
living together of the mother and the very young children. 
The only recognized relationship was kinship or membership 
in the clan. Owing in a large measure to the survival of the 
primal law of sexual monopoly of the head of the original 
horde, and perhaps also to a recognition of the injurious re- 
sults of inbreeding, the custom arose of contracting marriage, 



86 Historical Forms of Business. [§ 36 

or rather of entering into connubial relations, outside of the 
clan ; and thus there developed one of the most rigid rules of 
primitive society, the system of exogamy, or the prohibition of 
marriage between members of the same clan, as constituting 
incest. Each clan traced its descent from, and often took the 
name of, some mythical ancestor, — generally an animal or 
plant. This totem, as it was called, became sacred and was 
soon protected by a system of " taboo " or religious prohibi- 
tion. The origin of the totem worship is still shrouded in 
mystery, but is probably to be sought in economic reasons, — 
the totem being at first the chief source of food supply which 
afterwards became so useful for purposes of barter that its con- 
sumption by members of the clan was forbidden. Where 
conditions were favorable to an increase of population the 
clans, although always preserving their own integrity, developed 
into the wider groups of phratries and of tribes, all of them 
connected, however remotely, by blood relationship. The 
clans, and in some cases the tribal groups, were the centres for 
common sports, celebrations and worship, and in the clan or 
tribal customs we find the germ of what afterwards developed 
into both law and morals. 

36. The Family. 

The decay of the clan or gentile society was again due 
largely to economic causes. Where conditions favored the 
growth of the pastoral system, private property in flocks and 
herds arose, and the paramount position of the father as the 
bread-winner and the defender of the property was recognized. 
Where the hunting and root-grubbing stage was supplanted by 
a developed agriculture, the labor of the man in tilling the soil, 
constructing ^he house and maintaining the patrimony became 
of signal importance. The male is now the chief factor in 
the economic process, and we accordingly find the patriarchal 
family. Fai7iulus is the Latin for servant or slave : all the 
members of the new family group are the servants of the father. 
The family relations are primarily property relations. The 



§ 36] The Family. 87 

father owns the land, the flocks, the wife or wives, the children, 
the slaves, and exercises scarcely less authority over the other 
relatives that form a part of the family group. The father gives 
his name to the wife and children, and the patrimony is handed 
down from family head to family head. We now find that mar- 
riage by capture gives way to marriage by purchase ; and the 
group union of early gentile society is succeeded by the polyg- 
amy and finally the monogamy of the patriarchal head. The 
unity of this new family group is far closer and its discipline 
far more rigorous than that of the clan, and the recognition of 
these intimate economic relations leads to the growth of all 
those finer filial and fraternal ties which are the nursery of ethical 
progress. For a time the forms of the old gentile society are 
still preserved amid the newer and more vigorous patriarchal 
system, either under an agricultural regime, as in the recorded 
beginnings of Greek and Roman history, or under pastoral 
conditions, as in the story of the early biblical patriarchs. But 
with the undermining of the economic foundations of the 
clan system the whole structure of gentile society crumbled. 
Wherever territorial relations based on the community of 
wider economic interests replaced the old ties of blood re- 
lationship within the clan, tribal society developed into po- 
litical society and thus led to the origin of the state and of 
organized government. 

In Judaea, Greece and Rome, as in all countries that had 
to work out their own civilization, this gradual evolution can 
be clearly discerned. In other cases where a lower civilization 
was suddenly brought into contact with a higher one, the steps 
are often less gradual. Thus the contact of the Teutonic 
tribes with Rome engendered a rapid transition from gentile 
to political society, but with a decided abbreviation of the 
patriarchal period. Much the same is true of the influence 
of the English on the Irish septs, which lasted well into the 
middle ages, and on the Scottish clans, which finally disap- 
peared as a power only a century or two ago. 

The patriarchal family was thus primarily an economic 



88 Historical Forms of Business. [§ 36 

product. The family became and remained the basis of social 
and political life. With the growth of industry and commerce 
and the opportunity for independent activity on the part of 
the various members, the old family group split up and was 
contracted into the family of modern times with its smaller 
and more immediate circle. Finally, the most recent develop- 
ment of economic life with its freedom and its system of 
competition has powerfully contributed to a still further loosen- 
ing of the family discipline ; woman has emancipated herself, 
divorce has become frequent, the age of the effective inde- 
pendence of the children has been continually pushed further 
back. Thus there have been ushered in all the ethical and 
social problems of modern family life, a discussion of which 
transcends the scope of an economic treatise. 

The family thus constitutes the earliest form of business 
undertaking only in the original sense of an organization to 
secure a competence rather than a surplus. That is to say, 
production was carried on within the family, by the family, for 
the family ; both producers and consumers were members of 
the family ; each worked for all ; each consumed the products 
of all. Yet the first attempts at business enterprise in the 
modern sense of an organization for gain, of producing for a 
market, are associated with the later developments of the 
family groups. The great slave plantations of the Roman 
Republic, for instance, were distinct business enterprises. The 
larger family groups which became the village communities of 
the early middle ages and which, when subjected to an over- 
lord, developed into the manorial system were occasionally, at 
least in part, business enterprises, as in England after the 
period of the early enclosures. We find examples of this 
co-operative family or group enterprise not only in agriculture, 
but also in commerce, as in the trade transactions of the 
mediaeval communes, and even in industry, as in the Russian 
artels or co-operative groups of laborers that have survived 
to this day. In its essence, however, the family was not well 
fitted for business, in the sense of profit-making ; and with the 



§ 3/] Help or Hire System. 89 

increasing importance of the competitive life tlie abler in- 
dividuals who cut themselves loose from the family group 
forged to the front. With the greater conservatism which 
always marks the tillers of the soil we find this process slower 
in agriculture than in industry and commerce. It is accord- 
ingly in these latter directions that we must first look for the 
more developed forms of business enterprise. 

37. Help or Hire System. 

Where industry develops beyond the capacity of the family 
group and where the conditions are not favorable to the growth 
of slavery, we find the beginnings of industrial assistance from 
outside sources. The independent laborer who roves from 
house to house and from place to place does more of the 
work of the household. Carpenters, cobblers, glaziers, tin- 
smiths, masons, seamstresses, — these represent a few of the 
occupations conducted in this roving fashion. The itinerant 
workman receives a compensation for his services and often 
becomes for the time being a member of the family. This 
custom survives even to-day, not only in the New England 
institution which bears the significant name of " help " (even 
though the service has become somewhat more permanent), 
but also in the temporary assistance given to our Western 
farmers at harvest time by the " hired man." This system 
can thus best be termed the help or hire system.^ It is found 
in the early history of almost every society, and those familiar 
with the rural communities of Switzerland and Scandinavia 
will recognize it as the prevalent form to-day. 

In its essence, however, the help system is an intermediate 
and transitional form. The important factor is still the family 
group ; the consumer furnishes as before the raw materials 
and receives in return the finished product, the workman sup- 
plying the labor force and sometimes the tools. Gradually 

1 The term " wage-work," used by Biicher and his translator, Industrial 
Evolution, p. 162, is ill chosen, because the term wage-earner inevitably 
brings to mind the modern factory system. 



go Historical Forms of Business. [§ 38 

the change assumes a more rapid pace. The smaller house- 
holds find that they need outside help more frequently but less 
intensively, and the larger family groups find it profitable to 
set some of their superfluous assistants to work for others. 
The custom arises of the consumer going to the workman 
rather than the workman coming to the consumer. Thus the 
occupations of the village blacksmith, the miller, and even the 
ba«ker and weaver become settled trades. The itinerant work- 
man acquires greater permanence, and from assistants the 
laborers now evolve into a class independent of the family 
group. When this step is reached, we have what is known as 
the handicraft system. 

38. Handicraft System. 

Under this system the artisan is independent. He no 
longer works in the house of the consumer. He occupies 
his own house, he goes to market to purchase his raw mate- 
rials, he works up the raw material in his own home with his 
own tools and he sells the finished product to the consumer 
in his own shop. We no longer have production for the 
family, as in the family system ; we no longer have the raw 
material and the finished product belonging to the consumer, 
as in the help system. Every phase in the process down to 
the sale of the final commodity is in the hands of the workman 
himself. The workman or craftsman, moreover, finishes every- 
thing by hand, and it is for this reason that we speak of the 
handicraft system. This does not mean that things were not 
previously and even subsequently made by hand, but calls 
attention to the fact that the distinguishing mark is the grow- 
ing importance of industry and the rise of an independent class 
of workmen, who conduct business enterprises by themselves. 
Since the producer makes to order for a special customer, 
the system is also sometimes called the custom system, — a 
term still surviving in the custom-tailor of to-day. 

In the middle ages the workmen gradually banded them- 
selves together by trades into compact organizations known as 



§ 38] Handicraft System. 91 

guilds or crafts. Historically the system has therefore come 
to be known as the guild system. The guilds, however, were 
a result rather than a cause ; and in many parts of the world 
we find the handicraft system without the guilds. Under 
the guild system every workman might ultimately look forward 
to membership. Starting in as an apprentice, he spent a few 
additional years as journeyman, and when he had finally 
mastered all the details of the trade, he was admitted as 
master craftsman. To use modern terms, which had no 
meaning then, he was at once employer and workman, capital- 
ist and laborer. The modern differentiation of classes was 
unknown. At the height of their power the guilds often se- 
cured a political domination. In many countries they came 
to be virtually identical with the townsmen ; the division of 
labor between land and town assumed a sharply defined form, 
and the manor became more and more the simple purveyor 
of raw material for the guild. Just as the family system of 
industry corresponds to the typical isolated household economy, 
so the guild or handicraft system corresponds to the typical 
trade or local economy. 

The guild system characterized the industrial life of Europe 
for several centuries after the Crusades. With the increase of 
wealth, however, a twofold process went on. The guilds grew 
more grasping and exclusive, until they became monopolistic 
bodies, proving a drag upon industry instead of a help. 
Membership was confined to a select few whose right to 
practise the trade was inherited, and the mass of the workmen 
could no longer look forward to participation in its benefits. 
Nevver industries started wherever they could, in independence 
of the old crafts. Secondly, and more important, as the richer 
craftsmen amassed wealth, they as well as the larger traders 
desired to put it to productive uses. Thus, as we have seen, 
there developed a true industrial capital which could not well 
find employment within the limits of the old system. The 
guild or handicraft system slowly decayed, and there was 
ushered in the next stage, known as the domestic system. 



92 Historical Forms of Business. [§ 39 

39. Domestic System. 

Here for the first time we find a line drawn between ttie 
capitalist employer and the workman. In the help system 
there was also an employer, but he was himself both workman 
and consumer. In the handicraft system the employer was no 
longer the consumer, but was still, in part at least, the workman. 
In the domestic system the employer and the workman are dif- 
ferentiated. The method of sale of the finished product, more- 
over, is another point which distinguishes the domestic system 
not only from the help system but also from the handicraft 
system. In the help system the product is not sold at all ; it 
is consumed by the employer. In the handicraft system, where 
production is carried on on a small scale and to order, the 
commodity is sold directly by the workman to the consumer. 
Now, however, where capital has made production on a larger 
scale possible, the market is so widened that the individual 
workman is no longer able to control the means or to devise 
the machinery for placing the products on the market. The 
capitalist alone can do this. 

The essence of the domestic system consists in the fact that 
while the workman still owns his tools and conducts the work 
in his own home, often with the aid of his family and in con- 
nection with some agricultural activity, he no longer disposes 
of the finished product. In most cases, in fact, he no longer 
buys or provides the raw material ; for the same capitahst who 
disposes of the product also finds it possible to purchase the 
raw material in larger quantities. The division of labor goes a 
step farther than in the guild system. Not only does one 
class produce the raw material, and another the commodity; 
but the production of the commodity itself is now divided 
between two classes, the one buying the materials and market- 
ing the goods, the other furnishing the productive power or 
manual labor, the tools and the work place. 

The term domestic system is not a happy one, for under the 
handicraft or guild system the laborer also worked in his own 



§ 4o] Factory System. 93 

home. It is used, however, to distinguish this form of capitalistic 
enterprise from its successor where the laborer no longer works 
at home. Again, under the domestic system the laborer still 
works by hand, but since he is no longer in control of the en- 
tire process of production we distinguish it from the handicraft 
system. The term that was now applied to the domestic 
workman is manufacturer, the maker by hand {jnanus,facere). 
Sometimes, instead of domestic or home work, we speak of 
commission work. The capitalist owner of a commodity com- 
mits it to another independent individual to be worked up and 
returned to him. In the clothing trade to-day we still dis- 
tinguish between custom work (the old handicraft system) and 
commission work. 

The domestic system, which developed during the seven- 
teenth century and reached its climax in England in the 
eighteenth, was modified with the immixture of capital into the 
successive stages of business. The most important change 
was due to the desire to economize in production and to ap- 
ply capital lucratively through the invention of labor-saving 
devices, or machines, which substituted mechanical power for 
human labor. In the textile industries, the period before 
1770 marks the early experiments, the period 17 70-1 790 the 
development of the great mechanical inventions, the period 
1 790-1 830 the application of steam power, and the period 
after 1830 the widening of the market through the railway and 
the steamship.^ The other industries soon followed, and there 
was thus inaugurated what is termed the factory system. 

40. Factory System. 

This system is the one under which the modern world lives. 
Here the capitalist employer not only provides the raw mate- 
rial and disposes of the finished product, but also controls the 

1 The important dates are: Kay's flying shuttle, 1738; Hargreave's 
spinning jenny, 1764; Arkwright's spinning frame, 1768; Crompton's 
mule, 1779; Cartwright's power loom, 17S5; Watt and Boulton's steam- 
engine, 1785. 



94 Historical Forms of Business. [§ 40 

intermediate process. The machinery is so costly as to be 
beyond the reach of the workman ; and since the machines are 
the property of the employer the building in which production 
is carried on must also belong to him and is called the factory. 
The laborer is not his own master, as in the handicraft system ; 
he no longer owns the tools and the workshop, as in the 
domestic system : all that he does is to provide the human 
labor force which is applied through machines and in work- 
places owned by the capitalist employer. The stupendous in- 
crease of production which is thus rendered possible reacts 
upon the laborer, both as producer and as consumer. Popu- 
lation increases enormously, and there is a continual drift from 
the country to the city. Industrial society receives its modern 
shape, and the social income is divided into the rent of the 
landowner, the wages of the laborer, the interest of the capi- 
talist and the profits of the entrepreneur. " Manufacturer " 
no longer means the handworker, but the individual who em- 
ploys others to work for him. The development of capital 
leads to keener competition and speculation, new classes of 
capitalist middle-men arise and the machinery of credit and 
exchange is transformed. The predominance of the industrial 
capitalist employer is so pronounced as to give to the whole 
form of business enterprise the name factory system. 

So markedly different is this from any of its predecessors 
that the process which brought it about is commonly termed 
the Industrial Revolution. If by revolution, however, we mean 
a sudden and complete overturning of the old, the name is ill 
chosen. For the process was a gradual one. It took several 
decades for the transition in the English textile industries to be 
consummated, and in the other occupations the supplanting of 
the domestic by the factory system proceeded step by step 
during the nineteenth century. Outside of England, the 
movement came later and more slowly, while even in England 
there are still a few trades, like those of the glass-workers, the 
cutlers and the chain-makers, in which the factory system has 
made only slight inroads. 



§ 4i] Corporate Enterprise. 95 

It must not be thought that each of these forms of enterprise 
is marked off from the others by sharp lines. In every stage 
we notice survivals. The family system is still found in the 
outlying regions of almost all countries where modern ideas 
have not completely penetrated, as, for instance, the Southern 
Appalachian mountains ; the help system survives in various 
kinds of domestic and other service ; the handicraft method is 
typified in the cobbler or custom tailor ; the domestic system 
plays a considerable role in the hand-loom weavers of Europe 
and the sweat-shops of modern cities with their commission 
work in the clothing trade. The economic life of a people, 
however, is characterized by the type forms, not by the sur- 
vivals of a preceding system. Modern business enterprise is 
based to an overwhelming degree on the factory system. 

41. Associated and Corporate Enterprise. 

We have thus far discussed the growth of business enter- 
prise from the point of view of the differentiation of the entre- 
preneur. We have now to treat it briefly from the point of 
view of associated production. Here we can trace four stages, 
— enterprises carried on by individuals, by partnerships, by 
corporations, by trusts. 

(i) We have seen that while the family was the earliest form 
of associated activity it was not well suited to the keen eco- 
nomic struggles inseparable from business life. Business enter- 
prise really begins with the business man, and the business man, 
now as then, is to a large extent born, not made. Sagacity, 
boldness, good judgment and administrative ability have always 
been the mental equipment of the successful merchant. To 
the extent that the individual has possessed these qualities, he 
has forged ahead. As business enterprises increased, however, 
the individual often found himself unable to cope with the 
situation single-handed. He therefore associated himself with 
others who possessed some of the qualities which he lacked. 

(2) The partnership was a device to strengthen enterprise at 
its weak points. It meant the association of various kinds of 



96 Historical Forms of Business. [§ 41 

ability, and often of capital and ability, and multiplied to 
that extent the economic efficiency of the unit. The partner- 
ship, however, has decided limitations. The personal relation 
between the partners and the need of implicit confidence in 
each other necessarily restrict it to a few individuals. As 
soon as the business calls for the employment of a capital 
beyond the means or the desires of a few partners, a new form 
of enterprise is needed. This is supplied by the corporation. 

(3) Although according to the recent researches of Deloume 
and Weber the commercial corporation probably existed in 
the later centuries of the Roman RepubUc, in its modern 
shape it dates from the early mediaeval Italian cities. The 
earliest form was that of a so-called " bank," individuals 
associating their capital to form a joint stock, loaning it to the 
government on a pledge of certain revenues, and participating 
in the profits according to their holdings. Thus the beginnings 
of public credit and of corporate enterprise are found in- 
timately associated. The next important development of the 
joint-stock principle was in the trading companies of the six- 
teenth century, which were at first mere temporary associations 
for the purposes of a single voyage, but which gradually 
assumed a more permanent form. It was not, however, until 
the predominance of industrial over commercial capital in the 
nineteenth century that we find the immense expansion of cor- 
porate enterprise which marks modern life. 

The economic advantages of corporations are threefold, — 
joint stock, limited liability, perpetual life. Through the 
device of the corporate security, the number of the investors 
may be multiplied without limit. Every stockholder has a 
voice in the enterprise in proportion to his investment. He 
is liable for the debts or losses only to the limit of his own 
share. Modern states have been slow to recognize this prin- 
ciple of limited liability, but it now forms the very heart of the 
system. It removes the apprehension and distrust which lay 
at the basis of the overgrown partnership and the unlimited 
liability company. It has facilitated the marketing and trans- 



§4i]- Corporate Enterprise. 97 

fer of the shares and has rendered possible the vast accumu- 
lation and the minute dissemination of capital. Finally, the 
corporation, unlike the individual, never dies until the busi- 
ness is liquidated ; the shareholders disappear, the shares 
remain. It has all the advantages of permanence and stabil- 
ity ; it can plan for the morrow as well as for to-day, and by 
proper choice and renewal of its board of directors it can con- 
tinually command the highest ability and adjust itself to altered 
needs. 

As against these advantages there are undeniable short- 
comings. The " corporation problem " touches the threefold 
relation of the corporation to the investors, the employees and 
the public. The protection of the minority stockholders and 
of the " innocent investors," the mutual relation of the stock- 
holder and the bondholder, and the enforcement of real 
trusteeship on the part of the directors are matters that still 
remain to be adjusted. The conditions of employment are 
often modified by what is termed the substitution of the cash- 
nexus for the old-time personal bonds between employer and 
employee. The corporation proverbially has no soul. Finally, 
as against the public the corporation will often do what indi- 
viduals as such would shrink from doing. It is not a light 
task to raise the plane of corporate morality to that of individ- 
ual business ethics. With all its shortcomings, however, the 
corporation is indispensable to modern business activity. 
Without it the world would revert to a more primitive state of 
economic well-being, and would virtually renounce the inesti- 
mable benefits of the best utilization of capital. 

(4) Where the advantages of united capital on a gigantic 
scale become still more apparent, the associations of individuals 
into corporations are further developed into unions between 
corporations. These at first assume the form of more or less 
loose agreements, fixing prices or conditions of production. 
A further stage is reached when receipts are pooled, and the 
unions adopt the name of pools. A still closer association is 
effected when the enterprises are united under a common 

7 



98 Historical Forms of Business. [§41 

head, and known as trusts, because originally the co-operating 
corporations put their respective holdings of stock into the 
hands of trustees, who were to direct the joint enterprise. 
Where, as in the United States, this particular method of union 
has been declared illegal, the same results have been reached 
by forming a new and independent corporation. What are 
to-day popularly called trusts are simply huge corporations. 
The trust problem is therefore in many respects a phase of the 
corporate problem. From this point of view, as we shall see 
hereafter, the so-called trust is as much a natural development 
from the small corporation as the corporation itself is an out- 
growth of the business partnership, or the partnership an evo- 
lution of individual activity. The reasons and Hmits of this 
development will be studied below. It is clear, however, that 
with the growth and differentiation of capital, under the pro- 
digious development of modern industry, the forms of business 
enterprise are steadily becoming more intricate. 



CHAPTER VII. 
ECONOMIC DEVELOPMENT OF THE UNITED STATES. 

42. References. 

G. S. Callender, Selections from the Economic History of the United States 
(1909); E. L. '\iog2t.xi. Economic History of the United States (1907); 
Katharine Coman, Industrial History of the United States (1905) ; C. D. 
Wright, Industrial Evolution of the United States (1902) ; J. D. Whitney, 
The United States (1889); J. B. McMaster, History of the People of the 
United States (5 vols., 1883-1900) ; G. L. Beer, The Commercial Policy of 
England toiuard the American Colonies (1893), The Origins of the British 
Colonial System (1907), and British Colonial Policy ijj^-iydj (1908) ; 
E. L. Lord, Industrial Experiments in the British Colonies (1898) ; P. A. 
Bruce, Economic History of Virginia in the Seventeenth Century (2 vols., 
1896) ; W. B. Weeden, Economic and Social History of New England 
(2 vols., 1890) ; F. J. Turner, The Significance of the Frontier in American 
History (Am. Hist. Assoc, Report, 1893), 197-227 ; M. B. Hammond, 
The Cotton Industry (Am. Econ. Assoc. Publications, 1897). 

43. Early Period of American Economic Life. 

The United States is a particularly interesting illustration of 
economic development, because of its rapid pace and because 
of the co-existence of different phases. At the beginning the 
istriking fact, as in all colonies, was the contact of an intellec- 
tually advanced population with primitive economic conditions. 
The white man brought with him the civilization of the old 
world, and was saved the necessity of the painful evolution of 
centuries. Possessing the use of perfected tools, the concep- 
tion of private property, the institutions of government and 
of the family, it was impossible for him to revert to the hunt- 
ing or nomadic stage. The impracticability of converting the 
savage at once into a husbandman led to the disappearance of 

99 



loo Economic Development. [§43 

the red man before the economic onset of the colonist. Yet 
in the presence of a vast and unsubjugated expanse of nature 
the immigrant had to start afresh and to unlearn many a lesson 
of his former home. Coming from a trade or local economy, 
heVas thrown largely upon his own resources in a com- 
paratively isolated economy. Agriculture again became the 
predominant occupation ; an agriculture, however, now based 
not upon feudalism, but, in the North at least, upon the 
independent farmer. The attempts to introduce into the 
Middle states the types of mediaeval land relations could not 
be permanently successful ; and only in the South, for obvious 
reasons, was it possible to reintroduce the primitive system of 
slavery. 

The typical American was the backwoodsman, using his gun 
but wielding his axe, and depending primarily upon his hoe 
and plough. Step by step he cleared the forest and cultivated 
the soil, and in this continually renewed contest with nature 
hammered out those sturdy qualities of mind and heart which 
soon enabled him to add political to economic independence. 
The frontier is the home of democracy, because the frontier is 
the home of economic equality. As it was gradually pushed 
inland the communities which had left the frontier stage behind 
them developed from the family system of industry, through 
the help, into the handicraft and domestic system. The guilds 
which were fast decaying in the old world found no foothold 
in the new ; and as the villages and towns sprang up the in- 
significant industry was carried on by the independent handi- 
craftsman. Everywhere, moreover, agriculture was the chief 
source of wealth. 

In the South the increasing accumulations of wealth were 
put into more land and more capital. In the Middle states, 
and a httle later in the Northern states, the new wealth took 
the form of commercial capital ; and as it was gradually pushed 
into industry the domestic system arose. At the time of the 
Revolution and down to the war of 1812 the " manufacturer" 
was still the manual workman, and the whole industrial devel- 



<o 












<M 




•* 








(M 








O 












o 
o 

<T> 00 












P '^ 








1850 1 
BUSHE 
16 














F CORN: 

LLIONS OF 
14 




















O 5 








o °^ 
— (/) 

1— Q 














RODUC 

HUNDRE 
10 














a. 








•■- CO 






■ 




;o 


E 


= 




— 




<M 














O i/i 



o 
o 

o :^ 

in -) 

OT O 

I- c/) 

<i: z 

O o 



O ^ 



O o >o 



O n 







OS 






30 






I- 










CO 

UJ 

_J 

CO 

_J 
< 












o 

UJ 










2 
O 










u. 
O 










2 
O 

_J 
_1 

2 






























IN 













































O 









§44] Recent Growth. loi 

opment was insignificant in the extreme. The war with Eng- 
land and the years of unrest which preceded it brought about 
a shifting of capital from commercial to industrial pursuits, 
and the factory system was fairly inaugurated, in a few of the 
textile industries at least. Under the fostering care of the 
"American system," as the new protective policy was called, 
the industries throve, — although we must not exaggerate the 
influence of legislation upon what would at all events have 
been the natural, even if slow, evolution of industrial capital. 
For this natural growth in the North and East was due to the 
pushing of the frontier beyond the AUeghanies, and to the con- 
sequent accumulation of agricultural profits which soon took 
the form of industrial capital under the impetus of the demand 
of an increasing population for manufactured products. Nor 
was this growth checked by the reversal of the tariff policy and 
the adoption, during the thirties to the fifties, first of the Com- 
promise, and then of the so-called Free Trade systems, dictated 
by the manifest interests of the politically dominant South. 
The South, as the exporter of cotton and the importer of 
manufactured products, had clearly no interest in the develop- 
ment of industrial, as over against commercial or agricultural, 
capital. 

44. GroTvth of American Industry in the Nineteenth Century. 

The growth of prosperity during the middle of the nine- 
teenth century was due primarily to other causes, three in 
number: (i) the rich valleys of the Mississippi and its tribu- 
taries were reached by the tide of immigration ; (2) the aboli- 
tion of the corn laws in England opened a vast and profitable 
outlet for the increasing yield of wheat ; (3) the discovery of 
gold in California furnished an immense treasury of mineral 
wealth. There was thus repeated on a large scale what had 
occurred in a smaller way a generation earlier. This conver- 
sion of agricultural and mineral wealth into industrial capital 
assumed, however, a slightly different form. Although the 
textile and iron industries now supplied a larger output for the 



I02 Economic Development. [§ 44 

uicreasing demand of a quickly growing population, the chief 
need and the most lucrative employment of capital was associ- 
ated with the development of modern transportation methods. 
The railroad becomes the most striking form of corporate en- 
terprise. Up to the middle of the century the few corpora- 
tions — chiefly banks, turnpikes, canals and railways — were 
compelled to take out separate charters. Now under general 
incorporation laws the railroads multiplied and soon brought 
in their wake all kinds of industrial enterprises. From this 
time on the country was fairly launched on the wide sea of 
corporate activity. 

The agitation which culminated in the civil war was at 
bottom the political expression of an economic antagonism 
between two divergent systems. The one was based on agri- 
culture, and heaped up its wealth in the transition forms from 
an isolated to a trade economy resting on slavery. The other 
had but just entered on the stage of the capitalist economy, 
and the influence of the rapidly developing factory system in 
providing a home market for the independent Western farmer 
soon united the economic interests into a compact and self- 
conscious whole. The phenomenal growth of the fifties, which 
menaced the economic preponderance of the South, brought 
the conflict to a head. The South possessed if anything the 
greater statesmen, the more gifted military leaders and the bet- 
ter navy ; but when the outlet for its staple crop was stopped 
up by the civil war it died of inanition and fell a victim to 
the economic superiority of its industrially diversified and 
therefore more enduring antagonist. 

It took the South a generation to repair the ravages of the 
desperate conflict, but with the beginning of the new genera- 
tion the inevitable results appear. Here and there in the 
South the march of industrial capitalism is under full swing, 
and the conversion of the handicraft and domestic stages into 
the factory system is proceeding apace. The transition in 
several of the Southern states is bringing to the front eco- 
nomic and political issues which agitated New England a 



8 



o - 

?^ o 



=> o 



o 



Lu en 

-T ID 

CO 



(/I 



<c — < 
O X I 

^ o .1- 



o "5 

LlI UJ Q 



o 



o 



O' 



<>'^ 



o 

'x 
o 



s 


- 


CO 

< 

liJ 

1- 
< 
S 

ij. 

o 

o 
o 

(/> 

CO 

U 

_J 

Ul 

-I 
< 
> 


g 








s 




s 




«e 








- 








00 

EC 
< 






-J 

o 

Q 




• 


o 

CO 






O 
_J 
-I 








2 * 

o 






CO 

< 

cc 

Ul 

< 

u. 
o 

co 

o 
o 

1 


Q 
UJ 
0= CO 








I 


















CO 




















SI 












S4 


















1 


r 










1 




§ 44] 



Recent Growth. 



lo 



generation or two earlier, and which were fought out in old 
England before the middle of the century. 

In the North the post-bellum period witnessed an acceler- 
ation of the movement which had so auspiciously begun. 
Notwithstanding the great increase of industry in the East, the 
rapid opening up of the far West and the application of capi- 
talist methods to the exchange, and even in part to the produc- 
tion, of farm products so stupendously augmented the output 
that the prosperity of the country still in large measure rested 
on its agricultural wealth. Toward the end of the century, 
however, with the practical exhaustion of the free land which 
enjoyed adequate rainfall, the industrial movement, which had 
been gradually creeping farther west, now furnished a con- 
tinually more lucrative opening for the employment of the fast 
accumulating capital. By 1900 over a third of the entire pop- 
ulation lived in the commercial and industrial centres, and 
about a third of the exports consisted of manufactures. 

The change in the character of the national production, 
and the transition from agricultural to industrial conditions, 
are illustrated by the following tables : 

PRODUCTIONS OF THE UNITED STATES 
(IN MILLIONS). 





1850. 


1870. 


1900. 


Population 

Farm Products 


23 
not given 

$1,019 


39 

$1,958 

219 

4,232 


76 

$3,764 
1,063 

13.039 


Manufactures 



EXPORTS OF THE UNITED STATES (IN MILLIONS). 





i860. 


Per cent. 


1900. 


Per cent. 


Agricultural Products . . . 
Mining, Forest and Fisheries 
Manufactures 


$257 
19 
40 


81.13 

6.II 

12.76 


$835 

lOI 

434 


60.98 

7-47 
31-65 



1 04 Economic Development. [§ 45 

On page 105 will be found the details of the chief products 
of the United States, as well as the most important exports 
of manufactures. On the charts opposite pages 102-103, 
104—105 and 106 will be found statistics of the growth since 
1850 of certain agricultural products, general manufactures 
and iron ore. It will surprise many to learn that there were 
in 1900 six classes of manufactured products each aggregating 
over half a billion dollars in value of gross product, as against 
one agricultural product and no mineral products. 

45. Recent Development of American Industry. 

This vast increase in capital has not only engendered the 
transition to the period of trusts and huge corporations, but 
has emphasized the national and international significance of 
the modern movement. The economic unit in the United 
States is fast becoming a national unit. Industry is no longer 
confined to the old local limits. Commercial interests have 
overstepped the boundaries of any one state. Action by any 
one commonwealth inevitably reacts upon its neighbor. Eco- 
nomic and political methods framed on the old assumption 
that business is local are bound to create injustice and dis- 
satisfaction. Secondly, the transition to a more intensive 
capitalism and the growth of industrial exports mark the 
economic as well as the political maturity of the country. 
The acquisition of Porto Rico and the Philippines is more 
than a mere accident. The foreign market is becoming an 
adjunct to our industry rather than to our agriculture ; it 
assumes such importance because our economic welfare, so far 
as it rests upon international trade at all, will be affected more 
and more, not by what the foreigner must have in the shape of 
food, but by what he can be persuaded into wanting in the 
shape of finished products. 

There is, however, another side of the picture. The United 
States has so rapidly outgrown the swaddling clothes of its 
Vifant economic surroundings, and has stepped with such 
giant strides from its youthful social environment to the 



45] Recent Industrial Changes. 



105 



ANNUAL VALUE OF THE MORE IMPORTANT PRODUCTS 

(IN MILLIONS).! 

Manufactures. 

1900 1900 
gross net 

Iron and Steel $804 ^433 

Slaughtering & Meat Packing 790 684 

Foundry and Machine Shop . 645 378 

Men's and Women's Clothing 575 296 

Lumber and Timber . . . 567 308 

Flouring and Grist Mill . . 561 540 

Printing and Publishing . . 347 265 

Cotton Manufacture . . . 339 297 

Carpentering 316 177 

Woolen Manufacture . . . 297 212 

Tobacco Manufactures . . . 263 245 

Boots and Shoes 261 94 

Malt Liquors 237 203 

Cars 218 112 

Leather 204 186 

Masonry 204 125 

Bread and Bakery .... 176 89 

Lead Smelting and Refining . 165 77 



Farm 


Crops. 






1900 


1908 


Corn . . . 


$828 


$1615 


Hay . . . 


484 


621 


Wheat . . 


369 


620 


Cotton . . 


323 


627 


Oats . . 


217 


321 


Forest Prod'ts 


no 




Potatoes 


98 


190 


Orchard Prod'ts 84 




Tobacco 


57 


70 


Wool (1901) 


• SI (' 


06)129 


Mineral 


Products. 






1907 


Pig Iron 


260 


580 


Coal . . 


221 


657 


Copper . . 


98 


182 


Gold . . 


79 


89 


Silver . . 


76 


38 


Petroleum . 


76 


123 



VALUE OF EXPORTS OF MANUFACTURES 
(IN MILLIONS). 



Iron and Steel Manufactures 
Refined Mineral Oil . . . 
Copper Manufactures . . . 
Leather Manufactures . . 
Cotton Manufactures . . . 
Agricultural Implements 

Chemicals 

Wood Manufactures . . . 
All Manufactures .... 
Per cent of Total Exports . 



$26 



45 


68 


2 


58 


12 


27 


10 


24 


4 


16 


5 


12 


6 


II 


151 


434 


17.9 


317 



1 Arranged from the Twelfth Census of the United States (Vol. VII and 
Abstract), the Statistical Abstract of the United States, 3.nd The Mineral 
Resources of the United States. 



io6 Economic Development. [§46 

complex conditions of a full-grown industrial society, that the 
development has been most uneven. America presents in 
some respects the most striking contrasts. It is at once the 
youngest and the oldest of economic societies. It is the 
youngest, in the sense that there are still large tracts untouched 
by plough or harrow, awaiting the coming of the first settler and 
needing only irrigation to convert the desert into a garden. It 
is young because there are huge sections, only one step removed 
from the primitive economic stage, under conditions analogous 
to those which the old world faced many centuries ago. In 
another sense, however, America is not young, but old. No- 
where on the face of the globe has capital been applied to 
productive purposes with such intensity and such energy. 
Nowhere has man's victorious contest with the powers of 
nature been waged with such intelligence and such relentless 
vigor. Nowhere have the captains of industry prosecuted 
their quest for industrial supremacy with such alertness and 
ability. As a consequence, nowhere have the most ad- 
vanced forms of a highly organized, fully differentiated, thor- 
oughly complex industrial organism been evolved with such 
startling rapidity and such complete success. In the develop- 
ment of these new economic institutions America is leading 
the world and is showing other countries what stages they have 
still to traverse. While the movement toward combination of 
capital has even in Europe made only timid beginnings, it is 
revolutionizing American industry. In this sense America is 
old, — far older than most of its industrial rivals. 

46. Modern Problems of America. 

As a result of the forces just described, we are face to face 
with two sets of problems. The one set has its origin in the 
newer and less developed sections of the country, and may be 
illustrated by the currency question. This includes far more 
than is implied in the terra itself. It involves, in large sections 
of the West and the South, not so much an increase of the 
money supply as a rearrangement of the economic forces and 



§46] Modern Problems. 107 

a readjustment of the relations of indebtedness to productive 
capacity. With every shifting of the frontier farther westward 
we have had such periodical readjustments. At the very 
beginning of our national life, when the frontier was located in 
western Massachusetts, came the economic outbreak known 
as Shays' Rebellion. A generation later similar causes produced 
on the new frontier the troubles which culminated in the stay- 
laws of Kentucky. When the frontier reached the Middle 
West, almost half a century later, the same movement assumed 
the guise of the fiat money craze. Finally, after the lapse of 
another generation, when analogous economic forces worked 
out their result, not only in the frontier life of the West, but 
also amid the primitive economic conditions of large sections 
of the regenerated but as yet undeveloped South, we reach 
the discussion of silver currency which began in the seventies 
and culminated in the nineties. With the disappearance of 
the frontier and the not far distant industrial awakening 
throughout the entire South, it is probable that the money 
question will assume as subordinate a role in the future of the 
United States as it has assumed in the advanced countries of 
Europe. 

On the other hand, the second set of problems that confront 
us is due to the new and complex industrial conditions of the 
more advanced sections. These new conditions have given us 
the corporation problem, the wages problem, the tax problem, 
the colonial problem, the city problem. It is as idle to inveigh 
against the policy of territorial expansion, on the ground that 
such a scheme was not contemplated by Washington, as it 
would be futile to object to the regulation of combinations 
because this also involves a new departure. In the one case, 
as in the other, economic conditions have arisen which were 
unknown to the fathers, and which require for their solution 
a new analysis and a new method. 

What is peculiarly confusing, therefore, is the fact that on 
the one hand we have sections where the economic conditions 
are of a primitive type, while on the other hand in numerous 



io8 Economic Development. [§ 46 

parts of these sections themselves there have been grafted 
upon the still dominant and persistent primitive stock the 
shoots of the modern industrial type. The newer methods of 
transportation, as well as the modern media of exchange and 
distribution, have superimposed upon the simplicity of an 
undeveloped agricultural community the complexity of mod- 
ern industrial enterprise. The consequence is that the eco- 
nomic conditions of the country are supremely heterogeneous, 
although tending to become homogeneous. Because of this 
contest of the old with the new, we are in many respects still 
groping in the dark, dissatisfied in the more progressive com- 
munities with the survivals of old conditions, and trying to 
discern in the dim light of the future the final expression of 
the newer conditions which are soon to become universal. 



CHAPTER VIII. 
DEVELOPMENT OF ECONOMIC THOUGHT. 

47. References. 

J. K. Ingram, A History of Folilical Economy (1888) ; L. Cossa, An 
Introduction to the Study of Political Econotny (trans, by I^. Dyer, 1893) ' 
G. Cohn, A History of Political Economy (trans, by J. A. Hill, 1894) ; E. 
Nys, Researches in the History of Economics (trans, by Dryhurst, 1899) ; 
W. Bagehot, Ecojiomic Studies (1880), chs. iii-v; W.J. Ashley, Surveys 
(1900), 263-309, and English Economic History, I (1888), ch. iii, II (1893), 
ch. vi; L. L. Price, Short History of Political Economy in England from 
Adam Smith (1891) ; E. Cannan, History of Theories of Production (1904), 
chs. ix, x; S. N. Patten, Development of English Thought (1899), ch. v, 
and Dynamic Economics (1892), chs. i-vi ; H. Eisenhart, Geschichte der 
Nationaldhonomik (2cl ed., 1S9:) ; A. Oncken, Geschichte der National- 
okonomie, I (1902) ; A. Dubois, Precis de I'Histoire des Doctrines Econo- 
niiques, I (1903) ; J. Rambaud, Histoire des Doctrines Economiques (1899) \ 
A. Espinas, Histoire des Doctrines Economiques (1900) ; E. de Girard, 
Histoire de PEconotnie Sociale jnsqu''d. la Fin du XVI. Siecle (1900). 

48. Economic Theory in Classic Antiquity. 

It has often been said that economics is a modern science. 
In point of fact, it is only modern economics that is a modern 
science. Every economic stage which has been marked by 
any scientific thinking at all has had its own economic theory. 
The stars indeed moved for aeons before man thought of as- 
tronomy. So economic phenomena existed for centuries be- 
fore any attempt was made to analyze them. Once formulated, 
however, the economic theory of any period is usually nothing 
but the reflex of its economic life. 

The earliest speculation on economic phenomena of which 
we have any knowledge is that of classic antiquity. Prior to 
the Greeks we find only ethical exhortations on social reform 

109 



I lo Economic Thought. [§ 4S 

as among the Oriental nations, or practical treatises on agron- 
omy as among the Carthaginians. But both Aristotle and 
Xenophon, to mention no others, wrote distinct treatises on 
economics. Greek and Roman economic life was not only 
based on slavery, but never outgrew the period of domestic 
industry and petty trade. This explains both the content 
and the omissions in Greek and Roman economics. Wealth 
existed, and we find the term discussed ; but stress was laid 
primarily upon the uses to which it might be put by the indi- 
vidual. The idea of value was apprehended, and the distinc- 
tion between utility and value pointed out ; but no further 
application of the distinction was made. Private property had 
long been known ; and we thus find interesting theories as to 
its origin and justification as against the dreams of the com- 
munists, the socialists and the land nationalizers, who flour- 
ished then as now. Since the economic conditions were such 
that slave labor was highly productive, slavery was defended 
as a natural institution and as compatible with the highest 
morality. 

In the early system of industry the relation of master and 
slave was like that of husband and wife, of parent and child : 
the slave, the wife and the child all belonged to the household 
head ; their labor was necessary to the family maintenance. 
When in later centuries the economic conditions of imperial 
Rome made slave labor less productive, it is significant that 
the writers first pointed out the moral shortcomings, and a 
century or two' later the economic defects, of slavery. In the 
main, however, at the time of the chief prosperity of Greece 
and Rome, industrial capital did not exist as a controlling force 
in production : thus neither the term nor the idea is found ; 
capital is not yet differentiated from wealth. It is a striking 
fact that Aristot4e seems to have a premonition of a future 
industrial system when he says : " If the combs would make 
the web close, or if the keys of themselves struck the harp, 
masters would need no assistants nor slaves." But although 
capital had acquired no importance, a considerable division of 



,§ 48] Theory in Antiquity. 1 1 i 

labor based on handicraft industry is found in actual life and is 
accordingly discussed in the economic treatises. 

If the theory of production was simple, that of distribution 
was entirely absent. For it was the landowner who controlled 
the processes, and owned the results, of production. The land- 
lord was the property lord, and even where commercial capital 
developed, it was the large landowner who also carried on 
the great commerce. Even where the independent trader 
developed, however, his gains seemed to be of the same nature 
as those of the landowner. There was thus no distinction recog- 
nized between land and capital, as factors in production. The 
landlord, again, was the slave owner ; there was thus no line 
drawn between land and labor, and no theory of wages. The 
doctrines of rent, profits and wages did not emerge, because 
the phenomena themselves did not exist as the incomes of 
separate social classes. There was not even a theory of indi- 
vidual income ; the mass of property yielded indeed a return 
or produce, but this entire produce simply went to swell the 
property, just as the expenses had been a part of the property. 
We have many terms for property, but no distinction between 
produce and income. 

This explains also the classical theory of interest. Funds 
were loaned not as capital, but as money. So far as there was 
any credit, it was primarily for consumption ; that is, the loans 
were mere personal loans made to tide over temporary em- 
barrassment. Even when money was loaned in agriculture or 
in trade, the function of capital was not understood, because 
only when capital is used in industry is it easy to realize its 
productivity. Interest was thus regarded as paid for the use 
of money, and, as money is in itself barren, interest was deemed 
unjustifiable. As a matter of fact, the interest charged on such 
loans did often have the effect of usury and frequently resulted 
in the subjection of the debtor to the creditor. In the absence 
of industrial capital there was some justification for the theo- 
retic opposition to interest. In the later centuries of impe- 
rial Rome, when commercial capital had developed, interest 



112 Economic Thought. [§ 49 

became necessary ; but it was then defended in the Roman 
code by virtue of a legal fiction, not on economic grounds. 

During the later period of Greek and Roman life the origi- 
nal barter economy had given way to a money economy. 
The classic writers therefore devote some attention to the 
theory of money. The whole theory of price, however, was 
still much neglected, because trade was something outside of 
the ordinary activity of the slave plantation, and business en- 
terprise had but little scope under a system of handicraft in- 
dustry. It is thus easy to understand Aristotle's and Plato's 
condemnation of such vocations as something "unnatural," or 
Cicero's characterization of them as sordid and " unbecoming 
a gentleman." As with the private economy, so with the pub- 
lic economy. The revenues of government were derived 
chiefly from its own lands, worked in the same way as in any 
private household. Direct taxes were unknown except in ex- 
traordinary emergencies. The amassing of treasure, not the 
use of public credit, served for war purposes. Hence the 
Greek treatises on public finance deal with subjects that are 
almost completely absent from modern works. 

Classic antiquity, in short, had an economic theory which ex- 
plained its economic phenomena ; we must not criticise it on the 
ground that it does not explain our phenomena. 

49. Mediaeval Economic Theory. 

After the intervening centuri.es of mental darkness and indus- 
trial stagnation, economic theory began anew with the growth 
of enterprise in the twelfth century. The new theory was the 
outgrowth of the new economy. The typical fact of this new 
economy was, as we have seen, the development of trade and 
commerce, no longer based on slavery. The great problem of 
mediaeval economics thus became the problem of exchange 
value and how to make this new kind of values conform to 
the demands of justice. Since things were no longer made to 
be consumed at home, as in the earlier centuries, but were 
now made to sell, the question arose, for what shall they sell, 



§ 49] Mediaeval Theory. 1 1 3 

or what is the proper and reasonable price? The answer 
could not be the price as fixed by competition, because in the 
mediseval economy there was no free competition. Goods 
were produced by the guilds, but the guildsmen could not 
underbid each other. Even in articles which came from out- 
side, to take advantage of one's neighbor by purchasing the 
wares before they reached market, or by buying at wholesale 
to sell at retail, was deemed a heinous offence. In an economy 
whose keynote was production to order, and where every one 
did just what his father had done, custom, not competition, 
fixed the price. With human nature as it is, however, men 
would always be found who attempted to overreach their 
neighbors. Since custom could not be relied upon, it became 
necessary for government to step in and to regulate the price. 
In point of fact, when mediaeval prices were not regulated by 
custom, they were fixed by statute. 

Economic theory thus discussed the question : what is the 
just or the natural price? It became in part a moral question, 
even though the answer must rest on economic considerations. 
The mediseval economists were no longer the general philoso- 
phers, as in classic antiquity, but primarily the theologians. 
Economics became a part of theology. 

In framing his theory, the mediaeval economist had to take 
business life as he found it. The characteristic fact of mediae- 
val industry was the free laborer, the petty guildmaster. Slav- 
ery was fast disappearing, and accordingly, with the exception 
of a few of the early authors who were strongly influenced by 
the newly discovered writings of Aristotle, we find no defence 
of slavery. Again, since the whole economy was now based 
on industry and trade, the classical theory of business as an 
unnatural pursuit soon disappeared. Now arose the question : 
how should business gains be explained, — or, in other words, 
what fixes the price of the finished article? 

There could be only one answer to this question. Industrial 
capital did not exist, — that is, not as an important or typical 
fact. Since there was no conception of capital, there could be 



114 Economic Thought. [§49 

no theory of profits. The guildmaster employed his own 
work, on his own tools. The labor expended was the chief 
consideration ; and cost of production became the explanation 
of the reasonable price, and the guide to the legislator in fix- 
ing tariffs. To carry on business for the sake of making gains 
was therefore still deemed immoral, but to trade in order to 
recover the result of one's labor was justifiable. Money mak- 
ing as such is wrong ; money making to support one's self or 
one's family by the proceeds of one's industry is legitimate. 
All through the middle ages the economic theory objected to 
a man charging more for a thing than it was worth, or buying 
a thing cheap and selling it dear, or selling a thing at a higher 
price for credit than for cash. For in all such cases it was 
presumed that gains were made without any actual labor 
having been expended. It was only as business enterprise 
developed that the other constituent elements of gain were 
recognized ; but the theory continued to include them in the 
actual labor cost. 

The other great mediaeval theory — the usury doctrine — 
may hkewise be put under the head of exchange. For usury 
was regarded as the price paid for the use of money, itself the 
medium of exchange. In an age where the productive em- 
ployment of capital was unknown, the prohibition of interest 
did, on the whole, more good than harm. As commercial 
capital developed, the force of the prohibition was weakened 
by the economic theory of damnum emergens and lucrum ces- 
sans : if the lender could show that he had suffered any loss or 
had been prevented from making any gains through not having 
the money, he might charge a return. The wedge was slowly 
pushed farther in ; but it was not until industrial capital had 
developed at the close of the middle ages that a distinction 
was drawn between legitimate interest and illegitimate usury. 
In the guild system proper, where no capital was needed, 
interest was an anachronism. 

The only other economic topic that was discussed in addi- 
tion to these two fundamental points, was likewise one of 



§ 5o] Mercantile Doctrine. 115 

exchange, — that of money. Money became of such para- 
mount importance that we find the treatment of money prob- 
lems no longer confined to the theologians, but participated in 
by specialists. The mediaeval writers on money form almost 
the only class of lay economists, pure and simple. 

Mediaeval economic theory, therefore, centred about the 
problems of exchange. Production was so simple that it was 
not discussed. In the absence of capital, there was no ques- 
tion of production on a large or small scale. Since the pro- 
ductive process was a unit, there was not even a discussion 
of the division of labor. Problems of distribution there were 
but few. Since there was no industrial capital, there were no 
profits ; since the workman was in the main his own employer, 
there were no wages, or so far as wages were paid, they were 
paid by the consumer, and not by any capitalist employer. 
Even though the conception of rent to the landlord now 
appeared, the land was not normally bought and sold, and the 
landlord's rent was regarded, not as a separate source of in- 
come, but as a kind of property, like that of the ordinary 
townsman. Finally, problems of consumption attracted little 
attention. In an age when custom reigned supreme, and 
when unusual expenditure was deprecated as ungodly, the 
effects of social expenditure and the connection between social 
demand and production were so slight that they were scarcely 
noticed. 

The mediaeval economists therefore were confronted with 
comparatively simple problems. These problems they attacked 
with ability and with some degree of success. It was not long, 
however, before the economic conditions changed, bringing 
with them new problems and fresh attempts at analysis. 

50. The Mercantile Doctrine. 

Modern economics may be said to date from the close of 
the sixteenth century. This century is marked by one great 
fact which could not have failed to arrest attention, — the 
revolution in prices which went hand in hand with the intel- 



1 1 6 Economic Thought. [§ 50 

lectual revolution due to the printing-press, with the rehgious 
revolution due to the Reformation and with the political rev- 
olution due to the weakening of the feudal system. The 
colonization of the new world led to a vast influx of the 
precious metals ; the discovery of the trade routes to the East 
opened up new channels of commerce and revivified industry ; 
the old regime of customary prices slowly gave way before the 
new force of competition ; the guild system broke down as 
the power of capital made itself more apparent and as industrial 
conditions outgrew the narrow limits of the local economy. 
Thinkers like Bodin in France and Hales in England began 
to ponder these newer conditions of economic life and to 
discuss the relations of private wealth to public welfare. The 
economic theories from that time may be subdivided into 
three periods, — the mercantile theory, which first sought to 
crystallize the idea of the national economy; the theory of 
Adam Smith and Turgot, which represented the domination 
of the domestic system of industry, although in its cosmopol- 
itan ideas much influenced by the doctrines of the Physiocrats ; 
and finally the Ricardian theory, which marks the triumph of 
the factory system. 

The mediaeval thinkers had centred their attention on the 
money supply, and had used every endeavor to bring the pre- 
cious metals into the town and keep them there by controlhng 
each individual bargain through manipulating the exchanges, 
and similar devices. The newer school of economists still 
emphasized the importance of the money supply, but owing to 
the changing conditions of trade were enabled to recognize 
the futility of the old measures. According to them, a surplus 
of coin is indeed desirable, but it can best be secured by an 
excess of exports over imports resulting in a balance of trade 
rather than by manipulating the exchanges so as to secure a 
favorable balance in each particular transaction or bargain. 
The first great economic controversies were those between 
the advocates of the Balance of Bargain and Balance of Trade 
theories. Because of their insistence on this mere exchange 



§ 5o] Mercantile Doctrine. 117 

of merchandise, the newer writers are usually called the 
Mercantilists. 

In truth, however, this was only an incidental result of their 
teachings. The breakdown of the local economy and its 
replacement by the larger unit led thinkers to search for 
the true causes of national wealth and national greatness. 
They saw that this could be attained only by an increase of 
national production ; and since industrial capital was now 
making its appearance, they emphasized the need and the 
value of national industry. Just as the older theory was dis- 
proved at the beginning of the seventeenth century almost at 
the same time by an Englishman (Mun),a Frenchman (Mont- 
chr^tien) and an Italian (Serra), so the practical policy of 
national expansion and the abolition of the local restrictions 
on trade and industry were pursued by statesmen like Sully in 
France, Cromwell in England and later by Frederick the 
Great in Prussia. 

Judged from the present point of view, the error of the Mer- 
cantilists lay in confounding a balance of exports over imports 
with a surplus of production over consumption (see below, 
§200). At the time the theory was first formulated, how- 
ever, an increase of national exports was indeed the most 
obvious method of measuring the increase of national produc- 
tion. In the early stages of capitalist enterprise and of inter- 
national competition, the policy of national protection was 
suggested as a means of national industrial growth ; but this 
system was itself an advance on the narrow exclusiveness of 
the mediaeval town. The Mercantilists all clamored for " Free 
Trade," but their free trade meant a freedom of exportation, 
and a liberation of internal trade from the trammels of the 
local economy. The enlightened Mercantilists looked upon an 
abundant money supply not as the cause, but as the result, and 
therefore as the best indication, of industrial growth and 
national prosperity. 

The problems which confronted the economists of the seven- 
teenth and first half of the eighteenth century were thus prin- 



ii8 Economic Thought. [§ sr 

cipally problems of production and exchange, from the point 
of view of the relation of government to the social structure. 
Hence the terra political economy began to be used, and 
considerable progress was made in analyzing the problems of 
trade. The problems of distribution, however, were only just 
beginning; the domestic system of industry was differentiating 
a wages class ; and the growth of industrial capital was only 
slowly bringing into view the recipients of profits as against 
the recipients of the rent of land. The slight theory that we 
find on the subject is incomplete and often incorrect. It was 
difficult for the writers amid these half-developed conditions to 
go beyond the surface fact that low wages seemed to mean low 
cost and therefore successful competition with other countries. 
It was reserved for the great thinkers toward the close of the 
eighteenth century to voice the newer ideas on production and 
distribution alike, and to disclose the elements of public pros- 
perity, suited to the economic age in which they wrote. 

51. Adam Smith and the Physiocrats. 

If we were to sum up in two phrases the real contribution of 
Adam Smith to economics, it would be the theory of cosmo- 
politanism and the theory of distribution. Of these the one 
was original, the other partly borrowed ; but both were shaped 
by his economic environment. 

The statesmen of the eighteenth century had been pushing 
the Mercantilist doctrines to an extreme. While the system of 
national economic expansion had marked an advance as com- 
pared with the mediaeval system, the time soon came when the 
centre of economic interest was shifted from internal to exter- 
nal considerations ; and when what had seemed liberty from 
the one point of view now from the other appeared to be 
restriction. In certain countries at least the disadvantages of 
the system came to outweigh its benefits. Just as the guild 
system had originally been a spur to industry, but had ulti- 
mately become a drag upon it, so the mercantile system of 
regulation changed from a boon to a drawback. The advance 



§ 5i] Adam Smith. 119 

had consisted in emphasizing the national idea ; the retrogres- 
sion consisted in accentuating the exclusive idea. In the well- 
meant effort of the legislator to further industry, he often 
throttled it. The government now interfered with everything, 
and often accomplished less than nothing. The colonies, 
instead of strengthening the mother country, broke loose 
entirely or weakened her. Trade was conducted on the 
principle that what one nation gained the other necessarily 
lost. 

The very expansion of international relations, however, and 
the immense growth of the foreign market induced the eigh- 
teenth-century thinkers to take a broader view, x'^dam Smith 
and the Physiocrats, each influenced by the doctrine of Natural 
Law, endeavored to show that economic phenomena, like all 
others, were reducible to principle. The most important cor- 
ollaries of natural law were to them private property and 
individual liberty. The liberty whose economic aspect they 
emphasized consisted of complete freedom in internal industry 
and in external trade. The demand for freedom of industry 
no longer meant freedom from the action of local government, 
but freedom from the action of national government as well ; 
the demand for freedom of trade no longer meant liberty of 
export, but liberty of import as well. Just as it was recognized 
that the various provinces of a nation benefited from freedom of 
exchange among each other, so it was claimed that the various 
nations of the world would equally benefit. Instead of national 
exclusiveness, economists demanded cosmopolitan freedom. 
Under the influence of the natural law each nation would then 
derive its maximum advantage. 

This importance of the natural law of freedom in economics 
was emphasized by both Adam Smith and the Physiocrats. 
Although the Physiocrats were first in the field with the pub- 
lished system — the word Physiocracy denotes " the rule of 
nature " — Adam Smith taught the identical ideas at about the 
same time in his lectures at Glasgow. The doctrine of cosmo- 
poUtanism was in the air. 



I20 Economic Thought. [§51 

The other great theory — that of distribution — we owe 
primarily to the Frenchmen ; not so much indeed to the Physi- 
ocrats as to the great statesman, economist and philosopher, 
who was only a half-Physiocrat himself, — Turgot. The leader 
of the Physiocrats — Quesnay, the court physician — struck by 
the abyss between the luxurious noble and the squalid peasant, 
concluded that agriculture was the only source of wealth, and 
the peasant the only productive member of society. In an 
age of periodical famine the food supply seemed to him of 
transcendent importance. Turgot only half accepted this idea ; 
but taking his cue from the Physiocrats with their idea of 
natural law and their effort to trace the final distribution of the 
wealth created by the farmer, he analyzed industrial society as 
he found it, and saw that the product of industry was divided 
into separate shares. We now for the first time have a theory 
of capital, a theory of rent, a theory of interest and profits, a 
theory of wages. 

This theory was adopted and developed by Adam Smith. 
He rejected, indeed, the doctrine of the Physiocrats that agri- 
culture alone yields a net product. On the contrary, he 
generalized the conception, and maintained that all industry 
might yield a product. Thus we often speak of Smith as the 
founder of the industrial system of economic theory as against 
the agricultural system of the Physiocrats. But the funda- 
mental doctrines of Smith in respect to the laws of distribu- 
tion were similar to those of Turgot. Both Turgot and Smith 
lived in the midst of the domestic system of industry. This 
was more developed in England than in France, where the 
abuses of the guild system still lingered and where agricul- 
ture was more important than industry. Thus we find Turgot 
sharing in some points the views of the Physiocrats, while Adam 
Smith was able in part to cut himself loose. Turgot and Smith, 
however, attempted to explain the laws of rent, profits and 
wages, because now for the first time the capitalist employer 
was differentiated from the landlord, and because the wages 
class had assumed a new importance. The laborer, however. 



§ 52] Ricardo. 121 

still controlled the process of production ; the *' manufacturer " 
with Adam Smith is still the manual worker. 

Adam Smith, as also to a less extent Turgot, may therefore be 
called the theorist of the domestic system. He differs from the 
Physiocrats in accentuating the industrial rather than the agri- 
cultural element in wealth and production ; but he agrees with 
them in emphasizing the cosmopolitan rather than the national 
elements in public wealth. Because of this broader view they 
both attempt for the first time to study the whole range of 
relations between private property and public wealth, between 
liberty and industry. 

52. Ricardo and Modern Economics. 

Adam Smith wrote on the eve of the industrial revolution. 
It has often been observed that the year 1776 marked the 
publication of the Wealth of Nations and the Declaration of 
Independence, thus voicing the demand for liberty in industry 
as well as in politics. But it is equally worthy of note that the 
same year witnessed Watt's great discovery of the steam-engine. 
It took several decades for this and other great inventions to 
change the aspect of the industrial world ; but in less than half 
a century the transition had been accomplished in the leading 
industries of England, and was making rapid strides in the 
others. In France the process had scarcely begun; in the 
other continental countries the domestic system itself was still 
contesting the guild system. Hence the thinker who could 
analyze the new system of industry could be sought for only 
in England, for in no other country did that system exist. 
Ricardo was the first theorist of the factory system. 

It is no mere coincidence that Ricardo should have been a 
stockbroker. This man of genius, whose daily life trained him 
to observe the almost perfect sway of competition and the well- 
nigh complete fluidity of capital on the exchange, was well 
calculated to apply these considerations to a wider industrial 
world, whose characteristics were coming to be those of free 
competition and the supremacy of capital. Starting with a 



122 Economic Thought. [§52 

study of the money question. Ricardo ended with an analysis 
of industrial society. The theories of cosmopolitanism and 
liberty he took from Adam Smith, but he developed them 
further, because this theory of free competition seemed to be 
even more applicable to the factory system than to the domestic 
system. The former theory of distribution, however, no longer 
quite sufficed. The manufacturer was now not the manual 
worker, but the employer who did no manual work. The 
" moneyed interest," which in Smith's time was only slowly 
forging to the front, was now becoming the dominant factor in 
English life. The antagonism between land and capital led to 
a new analysis of rent in contrast to profits. The mass of the 
working population had become wage-earners, but England's 
growing prosperity seemed to rest on the development of 
capital. Hence the law of wages was re-analyzed, in terms of 
profit, and the acme of truth seemed to be realized in the 
statement that wages and profits vary inversely to each other. 
Moreover, since capital had now assumed a new importance in 
the shape of machinery, the study of capital became largely a 
study of the economic effects of machinery. Everywhere in 
the civiUzed world of to-day the study of the theory of indus- 
trial phenomena goes back to the analysis of Ricardo. 

The Ricardian doctrines themselves, however, have been 
modified in some points by recent investigation. It would be 
surprising if the century that has elapsed since Ricardo wrote 
should not have brought about changes in conditions which 
were soon reflected in theory. In some respects the theories^^ 
have been amplified rather than altered. The economic life of 
the last half-century has been marked by three great facts, — 
the increased consumption of the masses, the revolution in the 
means of transportation and the tendency of capital toward 
concentration. The changes in consumption have led to a 
deeper analysis of the central problem of value, especially 
through the efforts of Jevons and the Austrian school. The 
revolution in the means of transportation has given free scope 
to the force of speculation, and has led to its more careful 



^52] Modern Economics. 123 

study. The growth of capital has produced not only large- 
scale industry, but integrated industry, and has brought about 
a closer scrutiny of the monopoly problem. 

In other respects, however, the theory has been modified 
rather than amplified. The Ricardian doctrine of free compe- 
tition and natural liberty had two important practical corolla- 
ries : the one as applied to internal affairs meant laissez-faire 
or non-interference by government ; the other as applied to 
foreign affairs meant free trade. The experience of the nine- 
teenth century has conclusively shown that both these demands 
are of relative rather than absolute validity, and that under 
certain conditions they may prove detrimental rather than 
beneficent. This has led to a fresh analysis of the theories of 
liberty and competition, more suited to the modern changes. 

Above all, however, the complete triumph of industrialism, 
which was in its infancy when Ricardo wrote, has brought into 
clear relief many tendencies which were then scarcely discern- 
ible. Ricardo had elucidated the law of rent, but his theory 
of profits was incomplete, the connection between interest and 
profits dimly appreciated, and the relation of both to rent not 
clearly apprehended. Above all, the position of the laborer 
and the relation of wages to profits were not thoroughly grasped. 
In the first flush of the new regime the function of the capitalist 
was naturally overestimated, and an undue emphasis put on 
production. So far as social reform was deemed at all practi- 
cable, it was thought to depend on the prosperity of the capi- 
talist and the care taken by the laborers to marry late and have 
small families. 

It was the social discontent of the middle of the century 
which was responsible for a change. Karl Marx did an admi- 
rable work in showing the essential relativity of economic 
institutions and in pointing out the influence of economic facts 
upon social and political life ; and his keen criticism of existing 
theory and actual society did much to bring about a revision of 
the laws of distribution. While the socialist criticism, however, 
was fruitful, its constructive analysis was erelong seen to be as 



124 Economic Thought. [§52 

ojie-sided as the one which it had endeavored to replace. It 
has been reserved for recent economic theory, especially in the 
works of Marshall, Walker, Clark and their followers, to take 
the saner view and to show how and why social progress and 
the growth of capital are intimately bound up with the advance 
of the mass of the workers. Thus the modern theory of eco- 
nomic Hfe fits in not only with the facts of the business world 
but with the demands of social reform. The economics of 
to-day has finally reached the stage where it seeks to retain the 
cold impassivity of science and yet to reflect the warm glow of 
human interests and living ideals. 



Book III. 

Conditions of Economic Life. 



CHAPTER IX. 

PRIVATE PROPERTY. 

53. References. 



C. Letourneau, Property, its Origin and Developtnent (1901); E. de 
Laveleye, Pritnitive Property (trans, by Marriott, 1S78) ; F. de Coulanges, 
Origin of Property in Land (trans, by Ashley, iSgi) ; E. Jenks, History of 
Politics (1900), ch. x; H. S. Maine, Ancient Law (1S80), ch. viii, and 
Village Communities (1881), Lects. 3, 6 ; E. Kelly, Government or Human 
Evolution, II (1901), bk. i, ch. iii ; J. S. Nicholson, Principles 0/ Political 
Economy (1893), ^^- "> ^^- '' ! F- Seebohm, The English Village Com- 
munity (2d ed , 1883) ; F. W. Maitland, Domesday Book and Beyond 
('"^97) i J- Johnson, Pudimentary Society among Boys (Johns Hopkins 
Univ., Studies, II, 18S4) ; G. B. Newcomb, Theories of Property (Pol. 
Sci. Quart., I, 1886); E. Demolins, Comtfient la Route cree le Type Social 
(2 vols., 1 900- 1 903) ; L. Felix, Entiuickeliingsgeschichte des Eigenthums 
(4 vols., 1883-1896). 

54. Origin of Private Property. 

The institution of private property lies at the basis of modern 
economic life. It has become so ingrained into our modes of 
thought that we commonly regard it as a natural right. Never- 
theless private property, like every other economic institution, 
is the result of a long evolution. It is a relative rather than 
an absolute category. 

In the early stages of society the conception of private prop- 
erty is absent. Primitive man, like his brute ancestor, seized, 

125 



I 26 Private Property. [§ 54 

but soon consumed, his articles of food. Even when he learned 
to provide for the morrow, and like some animals to accumu- 
late a store of provisions, he was able to retain control of them 
only so long as no stronger savage came his way. There may 
have been temporary possession, there was no recognized 
ownership. The earUest idea of property as distinct from 
possession was communal, not private. As the human hordes 
roamed about from place to place in the quest of food, they 
came to regard certain sections as their particular preserves, 
into which no other savages were admitted. Appropriation 
and user thus became the germs of property, but it was social 
and not individual user. As concerted action was generally 
necessary in order to secure subsistence, the food was distrib- 
uted according to definite rules by the representatives of the 
group. Even religious objects, like sacred stones and feathers, 
were preserved by the group as a whole. 

The first type of private property is found in the ornaments 
and the scanty articles of clothing. These were almost from 
the outset regarded as an integral part of the personality of 
the individual. The next step was reached when certain 
weapons were taken out of the general stock and associated 
with the exceptional prowess of some member of the group. 
The weapons, like the ornaments, were supposed in some way 
to reflect the personality of the individual, and when he died 
they were usually burned or interred with his remains. As 
civilization reached a higher stage, the movable shelters or 
wigwams and the scanty stock of tools and utensils were re- 
tained in the ownership of individuals. We can, however, 
scarcely yet speak of any differentiation of private property. 
Its social importance was insignificant in the extreme, and 
there was no motive for accumulation. After a narrow limit 
had been reached, additional ornaments became a burden, 
more weapons and tools were valueless. The group, not the 
individual, efforts were still the controlling factors in the eco- 
nomic life. 

The decisive step was taken with the domestication of ani- 



§ 54] Origin. 1 27 

mals. As soon as it was discovered how to preserve flocks 
and herds, it was possible for the individual to dissociate his 
economic life, to a small extent at least, from that of the 
group, and by giving freer rein to his own powers to start on 
the path of independence and prosperity for himself and his 
own immediate circle. Private property now assumed a posi- 
tion of increasing importance : it created, as we have seen, 
the patriarchal family, and it engendered the distinction of 
rich and poor. Wealth now consisted of flocks and herds ; 
personal belongings in the shape of jewelry and treasure were 
prized not only for themselves but because they could be bar- 
tered for live stock. The original "chattels" are the "cattle." 
Human dependents, moreover, were needed to care for this 
increasing wealth : the wives and the children of the patri- 
archal head were regarded as his private property, and where 
even these did not suffice, we find the beginnings of slavery. 
The slave {famel) soon became the most important element 
in the family. On the other hand, there was no private appro- 
priation of land, because it was unnecessary. The herdsmen 
wandered, according to seasonal or climatic conditions, in 
search of fresh pastures, and the tribal customs were still suffi- 
ciently strong to prevent individuals from appropriating par- 
ticularly favored spots in the general area. 

Two points thus stand out clearly. First, private property 
consisted for a long time only of movables, animate or inani- 
mate, that is, of animals, human beings, and personal chattels. 
A community which is continually on the march cannot de- 
velop property in immovables. Secondly, the origin of private 
property is to be sought in user and seizure. Compulsion and 
even rapine are frequently the starting-points of the accumula- 
tion of wealth. Yet this selfish accumulation is the means of 
attaining a higher stage of welfare for the community as a 
whole. It increases not only production but civilization. The 
ethical stage of a pastoral tribe is superior to that of a group 
of hunters. The institution of private property, while intensi- 
fying many of the unlovely characteristics of human nature, is 



128 Private Property. [§55 

also responsible for those qualities, like thrift, foresight, fru- 
gality, energy, sobriety and sanity, without which no enduring 
progress was possible. Property was becoming private, but 
since the individual was still in large measure controlled by 
the group, the sanction of private property remained social 
in character. The individual was permitted to enjoy private 
property because it was recognized to be conducive on the 
whole to the interests of the group. From the very beginning, 
therefore, out of evil there came good ; out of the violence 
inseparable from early private property there evolved the 
orderliness of a stable society. 

55. Growth of Property in Land. 

The next step was taken when the developed agricultural 
stage was ushered in. This had two important results : it 
greatly extended slavery, and it created private property in 
immovables. It extended slavery, because profitable cultiva- 
tion of the soil was contingent upon an adequate labor force. 
Compulsory and gratuitous labor would naturally swell the 
gains of the owner. Increasing agriculture involved, under 
certain conditions at least, increa,sing private property in 
slaves. 

It also involved the creation of private property in immov- 
ables. As fixed settlements replaced the early temporary 
abodes, the need and utility of more durable habitations be- 
came evident. Private property in houses, however, rendered 
possible on a much larger scale the accumulation of personal 
belongings within the house, and this accumulation of wealth 
was brought about by the increased earnings of agriculture as 
contrasted with flock tending. The evolution of private prop- 
erty in land, however, was far slower than in the case of houses. 
In a few instances, where geographical and climatic reasons 
made it difficult for the pastoral group to eke out a living in 
common from the soil, as in Norway, and where there was less 
fear of attack from organized bands of marauders, the indi- 
viduals started out as farmers, each for himself and each 



§ 55] Property in Land. i 29 

appropriating as much of the land as he needed. User soon 
hardened into ownership. So also when new colonies were 
planted by the offshoots of communities long acquainted with 
agriculture, the colonists, as in America, naturally brought 
with them the practice of individual land ownership and sepa- 
rate holdings. In most places, however, where the grazier 
slowly turned into a farmer, the communal practices dis- 
appeared only by slow degrees. Just as the nomad group 
had pitched its tents together and had allowed the flocks to 
graze in common, so now the village houses were grouped and 
separate plots of land in the surrounding area were temporarily 
assigned to the cultivators. These temporary assignments of 
different grades soon became permanent, although the method 
of using them vi^as strictly subject to communal needs. For as 
population increased and the holdings were subdivided, the 
different grades of land were carved up into strips, the same 
individual often possessing sections in different parts of the 
arable area. This system of intermixed strips necessitated a 
whole body of communal rules in order to insure a proper 
cultivation. The strips were too small to be fenced off. In 
the open field system, as it was therefore called, not only was 
it clearly inadmissible for one man to use his strip as pasture 
with the risk that his animals might stray on the cultivated plot 
of his neighbor, but in addition far better results were obtained 
by planting large areas in the same way. Thus the mediaeval 
village community or mark was based on the idea of common 
cultivation, and the original community of property was long 
preserved not only in the forests, the free use of which under 
certain restrictions belonged to every member of the group, 
but also in the pasture land, where every one had the right to 
graze his cattle, and even in the arable land which, after the 
crops were taken off, reverted to communal use. 

While private property in land within the group was thus 
developing, there was another element at work, proceeding 
from above rather than from below. As the conquering tribes 
seized upon fresh tracts, it became of signal importance to 

» 



130 Private Property- [§55 

defend the settled agricultural possessions. This duty was 
assigned to the military chieftains, who in many cases were 
the wealthiest flock-owners. With the transition to agricul- 
ture, the old personal and tribal relations gave way to territorial 
and political relations. In other words, the state developed 
and the local divisions and counties were put under the pro- 
tection of the over-lords. The tenants, or vassals, whether 
individuals or groups, now paid a portion of their agricultural 
earnings as the price of protection, and the military occupa- 
tion of the district by the chieftain before long hardened into 
the institution of private property. The war lord became 
the landlord. The marquis was originally the defender of the 
" March." The property rights of the cultivator were held to 
be subordinate to those of the lord. Thus was ushered in 
the system of feudalism, based on the preponderance of the 
manorial lord and the hierarchy of social relations. 

In some cases the cultivators lost their original prerogatives 
and dwindled into mere tenants without any property rights 
at all. In other cases they contrived gradually to free them- 
selves from their rents and other feudal payments, while at 
the same time the common cultivation gave way, under the 
impulse of more modern methods, to individual tillage. In 
this manner was formed the peasant proprietorship of many 
European countries. The land became thus the private prop- 
erty of either the lord or the peasant, until finally with jthe 
development of industrial capitalism real estate was put on an 
equality with personal property. In America and many parts 
of Europe land is now bought and sold almost as readily as 
any kind of chattels. 

Here again we notice the social sanction of private property. 
The origin of property in land as of that in flocks was often 
connected with force and fraud, but in this case as the other 
the community as a whole was benefited. The private prop- 
erty of the feudal chieftain meant the growth of security and 
social order, which formed the foundations of increased pro- 
duction. The development of landed property within the 



§ 56] Theories. i 3 1 

communal group of cultivators was the result of the recognition 
of the social importance of individual action. As long as 
common cultivation brought about the best utilization of the 
fields, it remained the prevalent system ; but when in more 
recent periods the application of capital to land made an 
intensive cultivation possible, the advantages of a more individ- 
ual method were soon manifest. The old common or open 
fields were now enclosed, and each landowner, freed from what 
had become the shackles of a common cultivation, turned 
his own plot to the best use. Private property in land thus 
reached its climax, because it carried with it individual free- 
dom of use. The augmented agricultural profits were due to 
increased production, so that private property here again re- 
dounded in the main to the advantage of the community. 
Real estate like personalty, immovables like movables, have 
become private property because of the recognition by society 
of the social advantages of individual ownership. 

56. Theories of Private Property. 

Two important corollaries follow from what has just been 
said : first, the justification of private property is its social 
utility, and second, the extent of private property rights must 
always be limited by their social consequences. 

The earliest theory of private property as found in some of 
the Roman writers is the occupation theory. The doctrine 
that property belongs of right to him who first seizes it is, how- 
ever, one that can apply, if at all, only to the earliest stages of 
development. Where no one has any interest in the property, 
no one will object to the assertion of a claim by a new-comer. 
When property is without any discoverable owner, we still to- 
day assign it to the lucky finder. But when the property is 
already utilized by others, whether as groups or as individuals, 
or when the property is newly created by human effort, the 
assertion of the right of occupation involves a theory of force 
rather than of justice. The occupation theory may explain 
how the present legal title to certain forms of property origi- 



132 Private Property. [§56 

nated; it cannot serve as a justification of private property, 
except in the rare case of previously unoccupied or unutilized 
wealth. The mere fact that a person has seized a thing is no 
reason why he should retain it. 

The next doctrine was the natural rights theory. Private 
property, so we were told by the philosophers of antiquity 
and the publicists of the later middle ages, is a natural right, a 
part of the law of nature. It will at once be asked, however, 
what is denoted by nature ? If by nature we mean the physical 
and animal world outside of man, it is clear that the only laws 
of nature are the laws of the necessary relations of phenomena 
and that the only natural right is that which flows from the law 
of might or of the power which explains these phenomena. In 
this sense all civilization is an endeavor to escape from the 
original reign of natural law among brutes. Nature is here 
opposed to human progress. Private property, then, is un- 
natural because it is not found in a state of nature. If, on the 
other hand, by nature we mean the constitution of the entire 
universe, including man, and if it is contended that private 
property is natural in the sense that it is necessary to the full 
self-realization of the individual as the bearer of the world idea, 
the obvious rejoinder is that we are applying the term natural 
right to our temporary idea of what ought to be right, and that 
history unmistakably shows a continual change in our ideas-of 
what ought to be. The great philosophers of antiquity upheld 
private property in slaves as a natural right. Much of what 
we to-day consider natural, our descendants will deem un- 
natural. Our conception of nature in this sense is essentially 
ephemeral and mutable. 

Driven from this position, the natural rights school took 
refuge in the labor theory, and maintained that the real title to 
private property is derived from the toil and trouble experi- 
enced in creating it. Surely, it will be said, a thing belongs of 
right to him who produces it. But at once comes the reply : 
no one has created the land. As a consequence, we find 
thinkers of all ages, from Phaleas of antiquity to the disciples 



§ 56] Theories. 1 33 

of Henry George to-day, who contend that private property 
in land is unjust, while maintaining that private property in 
everything else is defensible. These critics, however, overlook 
the fact that the difference between land and so-called labor 
products is in this respect, at all events, one only of degree, 
because nothing is the result of individual labor alone The 
carpenter, it is said, rightfully owns the table which he has 
made. But to what extent has he made it? The tree which 
affords him the raw material was not created by him ; the axe 
with which the tree is felled is the accumulated result of 
centuries of invention expended by his ancestors ; the stream 
along which the log is floated is not of his making. To pass 
over all the other intermediate processes, how long would he 
be secure in the possession of the tools he has used or of 
the product he has finished, were it not for the protection 
afforded to him by the law? And finally, of what use would 
the tables be unless there were a demand for them on the part 
of the community ? The value of the table is as little the result 
of individual labor as is the value of the land. Society holds 
a mortgage over everything that is produced or exchanged. 

Since therefore neither occupation, natural law nor labor 
gives an indefeasible title to private property, some philoso- 
phers were led to frame the so-called legal theory of private 
ownership which is in essence that whatever is recognized as 
such by the law is rightfully private property. Obviously, how- 
ever, this is not an economic doctrine. Good law may be 
bad economics. The law generally follows at a respectful 
distance behind the economic conditions, and adjusts itself 
gradually to them. The legal theory tells us what property 
is, not why it is, nor what it should be. 

Thus we are finally driven to the social utility theory. This 
is really implied in the preceding theories and supplies the link 
that binds them all together. In ancient as in modern com- 
munities, the individual is helpless as against society, however 
much under modern democracy society may see fit to extend 
the bounds of individual freedom. If we allow the individual 



134 Private Property. [§57 

to seize upon unoccupied wealth, if we recognize the existence 
of certain rights in what are deemed to be the products of 
labor, if we throw the mantle of the law around the elements 
of private property, — in every case society is speaking in no 
uncertain voice and permits these things because it is dimly 
conscious of the fact that they redound to the social welfare. 
Private property is an unmistakable index of social progress. 
It originated because of social reasons, it has grown under con- 
tinual subjection to the social sanction. It is a natural right 
only in the broad sense that all social growth is natural. 

57. Limits of Private Property. 

If then social utility is the real justification of private prop- 
erty, it is clear that the extent of private property rights must 
find its limit in social considerations. Take, for example, the 
modern problem of irrigation. The English common-law 
conception of private property — the property that reaches, 
as has been picturesquely said, from heaven to hell — is a 
product of a moist climate, of conditions where there is an 
abundance or superabundance of water, and where private 
interest could be safely depended upon to give the best 
results. But in the arid and semi-arid regions of our western 
empire neither occupation nor labor is deemed to give an 
equitable title to the river or the adjacent riparian lands. 
The new code of private property which is springing up in 
the West is one in which individual rights are clearly and 
forcibly held subservient to those of the community. 

What is true of irrigable land in the West is true in varying 
degree of many forms of private property in the East. " May 
I not do as it listeth me with my own?" is a cry far less fre- 
quently heard than of old. Private property as a concept 
will no doubt always remain ; but the content of the concept 
is continually changing. Property in human beings was at 
one time considered economically advantageous and morally 
defensible. Private ownership of the highways was not so long 
ago usual and justifiable. In the city of New York to-day the 



§5 7] Limits. 135 

process of extinction of private property in docks is fast going 
on. On the other hand, the stealing of electricity or the 
tapping of a telegraph or telephone wire is at present punish- 
able as theft. If, as Carlyle tells us, no one believes what his 
grandfather believed, we may almost say that no one owns 
what his grandfather owned. 

The right of private property is a privilege conferred upon 
individuals by society. It is recognized as beneficial in general 
because of the consensus of opinion that in the main better 
economic results can be secured by the application of the 
principle of self-interest. In the present stage of the evolution 
of human nature, private property constitutes the chief incen- 
tive to better and greater production. The test therefore is 
always the social test. Where, however, the reason of the rule 
fails, the rule itself must fail. That is, where in certain cases 
the results of private property are clearly opposed to the 
social interests, society is justified in restricting the extent of 
the property right. Thus the private ownership of patents 
and copyrights is everywhere granted only for a term of years, 
the right of the owner thereafter lapsing in favor of society at 
large. Again, while property in land is in general beneficial, 
immense private holdings may sometimes check, rather than 
further, social progress ; and may lead to well-considered 
movements either to restrict their size, as in New Zealand, or 
to alter the form of the property right, as in the recent Irish 
legislation intended to convert the tenant into a peasant 
proprietor. 

Interference with the existing rights of private property 
must always depend upon a convincing and irrefragable evi- 
dence of its necessity. For in the main private property and 
individual liberty have been the correlative products of human 
civilization. The limits of economic freedom and economic 
competition which we shall discuss in the following chapters 
will throw light upon the bounds of private property. We 
shall see that the maintenance of property rights depends on 
the existence and the beneficence of competition. Where 



136 Private Property. [§58 

competition has given way to monopoly, the automatic control 
of property rights must be replaced by a more positive social 
control. Again, when the condition of equality, which under- 
lies the theory of competition, is absent, competition may 
lose its beneficent force and the economic interests of society 
may demand the fixing of a limit to the exercise of private 
property rights. Certain idealists would go much further and 
advocate communism or socialism. The communist demands 
the complete aboHtion of all private property; the socialist 
asks for the abolition of private property in the means of 
production while retaining it in articles of consumption. Both 
are so extreme that in their well-meant endeavor to rectify 
undoubted abuses, they would forego the chief advantages and 
concomitants of modern civilization itself. 

58. Content of Property Rights. 

/ 
y Property rights may be classified under five heads : the right 

of gift, the right of disposition by contract, the right of use, 
the right of bequest, the right of unlimited acquisition. Of 
these the first and second are well-nigh unquestioned. A 
man may not only give away his property as he chooses, but 
he may sell, lease, loan or pawn it. It is only where rem- 
nants of the old feudal law of real estate survive that we find 
any limitation put upon such rights. The third right is some- 
what less absolute. As against the doctrine of " vested rights " 
of private property, the theory of " eminent domain " forms 
the entering wedge of social control which is being continually 
pushed further in by the principle of public policy. Again, 
a man may commonly use his property as he likes. But he may 
not use it in such a way as to create a nuisance to his neigh- 
bor. The individual right is subject to social restrictions. 

It is, however, around the fourth and fifth heads that the 
chief controversy has taken place. The right of bequest or 
inheritance is one of late growth. Long after private property 
was instituted its existence lapsed with the death of the 
original owner and the property itself reverted to the social 



§ 58] Content. 137 

group. Long after the right of bequeathing chattels de- 
veloped, there was no such privilege connected with real 
estate. Wills and intestate succession are everywhere the out- 
growth of the family, — the immediate kinship which, as we 
know, was the product of economic forces. To insure the 
perpetuation of the property beyond the life of the testator 
became one of the most potent factors in the desire of acquisi- 
tion and in the economy of production. Where the economic 
and social importance of the family is great, we even find that 
the right of bequest becomes a duty, with the correlative right 
of inheritance on the part of the surviving members of the 
family. Such, for instance, is the portion legitime or legal right 
of the children in France and Germany, or the dower right of 
the widow in Anglo-Saxon countries. 

With the weakening of the family sentiment in modern 
times and its restriction to a continually smaller group, the 
movement for a limitation of inheritance has begun to make 
some headway. The great development of modern progressive 
inheritance taxes and more especially of collateral inheritance 
taxes is an illustration of this tendency. When the rate of 
such taxation reaches 15% as in the United States a few years 
ago, 18% as in England, and 20% or even 25% as in some of 
the states of Switzerland and Australasia, we are on the high- 
road to a considerable limitation of the right of bequest. 
There is every reason to believe, however, that just as the 
kernel of the intimate family will continue to subsist, the 
movement will be arrested at that point where it might imperil 
the tendency to acquisition. 

On the other hand, the right of unlimited accumulation of 
wealth has scarcely been affected. Even though it may be 
conceded that the heaping up of enormous fortunes may 
seriously strain the machinery of democratic government, there 
is an insuperable difificulty in fixing any point beyond which 
the further accumulation of wealth may be declared economi- 
cally or politically dangerous. We refer here to wealth in 
general, honestly acquired. Private property in certain things 



138 Private Property. [§58 

indeed is considered wrong, irrespective of amount ; dis- 
honesty is as reprehensible and as frequent (or as infrequent) 
in a small as in a large business. Great fortunes in general 
can be honestly acquired only by conferring great advantages 

v{ on society ; he who serves the community best will reap the 
greatest profits. The successful and upright business man 
retains the market only so long as he undersells his compet- 
itors, and to that extent benefits the consumers. To check 
profits would mean to check enterprise ; to check enterprise 
would mean higher prices and greater sacrifice. The limitation 
of wealth as such is impracticable and economically perilous. 

No one, however, would gainsay the essential reasonable- 
ness of the general feeling that prodigious inequalities of 
fortune are in the long run a menace to the stability of demo- 
cratic virtues. But the solution of the problem cannot be 
found by opposing private property as such, or by erecting 
a barrier to the accumulation of wealth. It is futile to deny 
or to minimize the basic importance of private property on 
which the entire civilization of modern times is built. The 
economic ideal may best be expressed in the words of Aris- 

J totle of old, — that property should be private, but its use 
common. What he meant was to inculcate the idea of the 
public trusteeship of wealth, of the principle of the social 
responsibility of the wealth-getter. Economic progress is 
indeed intimately bound up with the institution of private 
property, and yet society is asserting a claim to be heard in 
its control and disposition. We are beginning to realize the 
duties as well as the rights of wealth. This moral obligation 
is based on the sound economic conception of social utility 
as at once the justification and the limitation of private 
property. 



CHAPTER X. 
COMPETITION. 

59, References. 

A. T. Hadley, Freedom and Responsibility (1903), ch. v ; R. T. Ely, 
Evolution of Industrial Society (190"), part 2, ch. i; J. S. Nicholson, 
Principles of Political Economy (1893), bk. ii, ch. v; E. Kelly, Govern- 
ment, or Human Evolution, I (1898) ; P. Kropotkin, Mutual Aid a Facto?- 
0/ Evolution (1902); W. W. Willoughby, Social Justice (1900), ch. ix ; 
C. H.Cooley, Personal Competition (Am. Econ. Assoc, Economic Studies, 
IV, 1899) ; A. R. Wallace, Studies, Scientific and Social (2 vols., 1900), 
chs. xiv-xvii, xxiii, xxviii; A. Marshall, Some Aspects of Competition 
(Jour. Stat. Soc, LIII, 1890) ; Clark and Giddings, The Modern Dis- 
tributive Process (1888). 

60. Nature of Competition. 

Competition is in a certain sense the law of all life. Biology 
has made us familiar with the animal struggle for existence 
and has disclosed the process of natural selection, as resulting 
in the survival of the fittest. The chief form of this conflict is 
between the living being and the forces of nature, the struggle 
of the individual to accommodate himself to the environment, 
and the evolution under favorable conditions of those who 
survive by learning so to accommodate themselves. When 
nature is niggardly and her resources do not suffice for all, the 
struggle with nature is reinforced by a contest between the 
various groups or units to secure their share. It is here that 
competition emerges, — not a struggle against nature, but a 
conflict of one unit with another in order to enjoy the bounty 
of nature. 

It is a striking fact that the earliest form of competition 
is a group competition rather than an individual competition. 

139 



140 Competition. [§ 60 

At all events, without going back to the beginnings of life, it 
is reasonably certain that the first competition found among 
human beings, as indeed is still the case with most animals, 
is the competition of one horde or pack with another in the 
endeavor to secure the means of subsistence. Thus from the 
very outset the principle of mutual aid emerges, and competi- 
tion between the groups is possible only because of co-opera- 
tion within the group. These early forms of co-operation are 
seen in the American frontier life when the neighbors come 
in to the " log-rolling," the " raising " of the building, the 
"husking bee" or the "sugaring off" of the maple trees. 
With the development and differentiation within the group, the 
principle of natural selection, that is, of competition, makes 
itself felt as between the members of the group ; but the 
process is slow because the welfare of the individual is deemed 
to be subordinate to that of the whole. As the groups become 
larger and more powerful, we notice continually higher forms 
of mutual aid, but we find at the same time more play given 
to the activity, or, in other words, to the competition, of the 
individual. Finally, in historic times the competition between 
nations is decided not only by the character of the state, as 
the most developed form of human co-operation, but still more 
by the results of the competitive struggle within the nation in 
developing those qualities of body and mind on which politi- 
cal power ultimately rests. Competition in one form or an- 
other is coterminous with life itself. 

If competition, as a biological conception, is thus an ex- 
planation, in part at least, of progress, it becomes of even 
more importance when applied to the economic domain. 
The subject matter of economics is human relations to wealth. 
The difference between man and animals is not that man 
economizes wealth (for some animals do the same), but that 
he produces wealth. Competition therefore in human eco- 
nomics is not simply a contest to divide an existing sum, but a 
struggle to share in an increasing stock. The first requisite 
of securing an additional share is to produce more. In this 



§ 6i] Forms of Competition. 141 

struggle to dispose of the increased product to the whole body 
of consumers, the victory will lie with those that can create 
better or cheaper products. The surest method of capturing 
the market is to undersell one's competitor. Thus competi- 
tion, as a business principle, means a struggle to augment 
wealth through a lowering of cost. If competition in biology 
leads only indirecdy to progress, competition in economics is 
the very secret of progress. Under normal conditions com- 
petition is indeed the life of trade. The individual competitor 
may incidentally amass a fortune, but if he does so honestly 
(and dishonesty is not an attribute of wealth, but of individ- 
uals, whether rich or poor), it can only be by conferring upon 
the community still greater benefits. He conquers who does 
best for society. 

Competition in economic life, therefore, is a potent factor 
in the growth of capital. Working hand in hand with the prin- 
ciple of private property, it is the chief incentive to progress. 
Through it we secure the extension of the margin of utilization, 
the accumulation of the surplus available for human wants. 
Competition, moreover, is the great safeguard of society. 
It is the protection of the consumer against the high price 
which accompanies exorbitant profits ; for it is the automatic 
force which reduces the gains of the inefficient and makes 
profits depend on low, rather than on high price. It evokes 
in individuals the fundamental characteristics of energy, thrift 
and power ; and it harmonizes to a large extent the interests of 
the individual and of society, by making the success of one 
depend primarily on what he can accomplish for the other. 

61. Forms of Competition. 

The chief forms of competition are five in number, — com- 
modity competition, individual competition, market competi- 
tion, class competition and race competition. 

(i) By commodity competition is meant the competition 
due to the existence of social choices. Every individual is 
continually debating with himself whether to purchase one 



142 Competition. [§ 61 

commodity in preference to another. Where he is on the 
margin of doubt or of indifference the sHghtest alteration in 
the price will cause him to substitute something else. The 
principle involved is hence called the principle of substitution. 
The vendor must constantly be on the watch lest any increase 
of price cause the disappearance of his sales. We substitute, 
however, not only one thing for another, but also one agency 
of production for another : in the crucible of economic wants 
everything is finally tested by its capacity to afford the greatest 
satisfaction. Not only will the consumer choose now this and 
now that commodity, but the employer will increase now his 
labor force, now his stock of machinery, so as to secure the 
best results. The least change in the rate of wages or of 
interest may lead him to substitute the one for the other. 
It is only by replacing the less efficient by the more efficient 
factor that the producer is able to induce the consumer to 
select one commodity in preference to another. Competition 
of factors of production is thus really an adjunct to commodity 
competition. Competition through substitution is hence im- 
portant in that it fixes a maximum limit beyond which prices 
cannot go. Every economic factor, like every economic good, 
may be in either actual or potential competition with another. 
The existence of competition, however, implies the mobility or 
free interchange of the factors of production from enterprise 
to enterprise and from commodity to commodity. When the 
fluidity of capital and the transferability of labor are complete, 
the competition is absolutely free. When there are hin- 
drances to this mobility, we speak of economic friction. The 
substitution of one commodity for another may be hindered 
by legal, social or economic causes. Under normal condi- 
tions, however, the competition is real and effective. 

(2) The competition of individuals with each other de- 
notes a rivalry, not between the producers of different com- 
modities or between the different factors of production, but 
between the producers of the same commodity or the same 
factors of production. Under normal conditions competition 



§ 6i] Forms of Competition. 143 

here puts every one on his mettle, and success is a measure of 
the contribution to the social fund. The more a laborer pro- 
duces, the higher his wages will be ; the larger the output of a 
particular cotton mill and the lower the cost at which it can 
market its goods, the greater will be the benefit to the con- 
sumer as well as the advantage to the particular producer. 
Competition between individuals is in its results a struggle to 
enhance efificiency, to increase faculty, to multiply productive 
power, to augment ingenuity, in short, to develop economic per- 
sonality. The more potent the personality, the greater will be 
the command over the powers of nature, the more rapid will 
be the development of the wealth which, although owned by 
individuals, yet inevitably ministers to the welfare of society. 

(3) By market competition we mean, not the competition 
of individuals in the market, but the competition of markets 
with each other. Market competition includes, indeed, both 
commodity competition and individual competition in the sense 
that in every market individuals as well as commodities com- 
pete with each other; but it is something over and above 
these. Every great city is continually striving to develop as a 
centre of distribution and exchange, in the well-founded hope 
that the wealth thus amassed will lead to productive efficiency 
in other lines. New York is competing with Baltimore for the 
grain trade ; New Orleans with Galveston for the cotton trade. 
Competition between markets seeks to overcome the factor of 
distance, and lies at the root of the problem of modern methods 
of transportation. Here again market competition leads to 
reduced cost, and the struggle for market supremacy can 
be fought to a successful issue only through more effective 
service. 

(4) Class competition is the result of the differentiation of 
modern society into groups of producers. We have not only 
the great division into laborers and capitalists, but the further 
separation of the latter into the owners of agricultural, com- 
mercial and industrial capital — that is, landowners, mer- 
chants and factory owners — and the still further subdivision 



144 Competition. [§ 6i 

of each class into minor groups. It pleases some writers, like 
the socialists, to erect this principle mider the name of class 
conflict into the fundamental explanation of all economic 
change, and to regard it as involving not only the expropria- 
tion of the victim, but the ultimate downfall of society as well. 
In reality class competition, while as inevitable as the other 
forms of competition, is within proper bounds just as beneficial. 
Under a system of free competition capital will flow into in- 
dustry in preference to agriculture only when industrial pur- 
suits are more productive, that is, when the community as a 
whole sets more store by the products of industry. Whether 
i/the moneyed interest or the landed interest is more prosperous 
depends at bottom upon their success in making converts 
among the consumers, and the extent of conversion depends 
on what they can oifer in the way of lower prices or better 
products. The laborers and the capitalists again represent 
competing interests, but the share of each in wages and profits 
depends ultimately, as we shall see, on their relative contribu- 
tion to the common product. 

(5) Race or national competition in its economic aspects is 
the final form of the modern struggle. The most marked 
characteristic of recent progress is the gradual substitution of 
peaceful rivalry of commerce for the sanguinary clash of arms. 
The modern weapon is not the javelin or the rifle, but the 
enterprise of the domestic producer aided by the exporter. 
Every nation that has reached commercial or industrial matu- 
rity endeavors to seek in the foreign market a profitable outlet 
for its own surplus productions. This attempt to secure a 
market is indeed responsible for an occasional war. lathe 
main, however, the struggle to-day is one for cheapness, and 
in the end it is not the large army or navy but the most effi- 
cient producer that permanently retains the neutral market. 
It is not to be denied that both a large army and a large navy 
may be needed to protect the commercial or other national 
interests ; but the foundation of military greatness in modern 
times is primarily economic, and when economic efficiency 



§62] Dangers of Competition. 145 

has disappeared, military strengtli must also disintegrate. 
Great nations are now judged, not by the numbers of their 
battalions or ships, but by the volume of domestic production 
and foreign trade. Economic power represents potential mili- 
tary capacity. Here, again, national competition is salutary. 
The fundamental error of the old mercantilistic doctrine was 
the belief that what one nation gains in trade, the other neces- 
sarily loses. The modern doctrine is that every nation is 
helped by the prosperity of its neighbor, on the principle that 
the more wealthy the customer the greater will be his pur- 
chases. Both nations may gain, although one may gain more 
than the other. The foreign markets can be retained only by 
underselling ; the profits of one country can be secured only 
by conferring these advantages on the consumers of the others. 
National competition, like personal and class competition, can 
benefit the individual country only by benefiting the group ; 
it enriches one nation, but incidentally develops the others. 

62. Dangers of Competition. 

In describing the essential beneficence of competition in its 
various forms, we must not blind ourselves to its shortcomings. 
Some of these evils are inevitable. Where there are a contest 
and a victor, there must be a victim. There can be no 
struggle without some pang to the conquered. Suffering is an 
accompaniment of progress, just as sacrifice, at least in the 
sense of effort, is a prerequisite to enjoyment. In the animal 
world, where the sway of competition is relentless, the evil is 
pronounced. Progress there is purchased by the death of the 
victim. The fight is one of bestial instincts and brute powers, 
— the victory, however beneficial to the race, is secured at a 
tremendous sacrifice. Human competition, on the other hand, 
has in its economic form, as we have seen, something in 
common with, but also much in contradistinction to, brute 
competition. Economic competition may indeed involve the 
economic death of the unsuccessful competitor. The producer 
who is undersold by his rival will ultimately be compelled 

10 



146 Competition. [§ 62 

to abandon the field. His adversary's success, which means 
progress for the consumer, spells his ruin. 

There are, however, two points in which brute and human 
competition are unlike. In the first place the economic de- 
feat may be only temporary. The producer who has failed 
in one business, often succeeds in another for which he is 
better fitted. His original failure may be the means of re- 
doubled efforts and final victory elsewhere. His downfall is 
not necessarily his end, but may be his real beginning. In 
the second place, in economic competition there may be no 
death at all, but only a relative defeat in the sense that the 
progress of both competitors is unequal. Laborers compete 
with capitalists, one country vies with another ; both may con- 
tinually gain, even though in different proportions. In brute 
competition the struggle is only for consumption ; in human 
competition the contest takes the form of production. In the 
end, indeed, the goal of both is enjoyment ; but the means 
of reaching the end are different. This difference renders 
possible a participation by both contestants in the gains of 
production that are caused by economic competition. 

Even with these qualifications, however, competition is often 
a painful process, none the less painful because the struggle 
has been transferred from the arena of bodily strength to that 
of mental capacity. The competition, moreover, may some- 
times become so fierce that for a time at least it exhausts the 
powers of both competitors. This is the " cut-throat competi- 
tion " of which we have heard so much in recent years, when, 
in the effort to capture the market, prices are reduced below 
the cost of production. The temporary advantages to the 
consumer are dearly purchased through the ruin of all the pro- 
ducers. Here we see competition at its worst, because all 
competitors are pulled down to the level of the most unscrupu- 
lous. In the same way there may be excessive competition 
bet\<^een laborers, as when the necessities of the laborers com- 
pel them to accept the standard of the worst-paid or hardest- 
worked laborer. In the one case as in the other this unfair 



§63] Limits of Competition. 147 

competition endangers the perpetuity of a successful business 
or of a prosperous working class. The question then arises as 
to whether it is not possible to conserve the chief advantages 
of competition and at the same time to lop off some of its 
excrescences ; to maintain the social benefits while minimizing 
the individual costs. In other words the question is : what 
are the real limits of competition? 

63. Limits of Competition. 

The problem may be approached from three points of view, 
— the level of competition, the maintenance of equality and 
the existence of quasi-public enterprises. 

(i) The fundamental distinction between brute and human 
competition, underlying all the others that have been men- 
tioned, is the point with which we have become familiar, 
namely, that while animals are governed by their env^ironment, 
man, to a certain extent at least, can alter his environment. 
This is true not alone of the physical, but to a much greater 
extent of the socio-economic environment. The function of 
society is to raise the general plane of competition. Even in 
that extreme form of competition known as war, international 
agreements have succeeded in preventing a certain amount at 
least of wanton injury and needless suffering, without in any 
degree impairing the real intensity of the conflict. It is no 
longer true that "all is fair in love and war." In economic 
life, similarly, we often hear of unfair or cut-throat competition, 
with the implication that unworthy and reprehensible measures 
are being employed. With the development of business life 
there has been a continual movement away from the early 
brute-like struggle. The community to-day is frequently con- 
trasting " fair " with " unfair" competition. Not only does the 
idea of what constitutes a " fair " competition change from age 
to age, but it differs at the same age in different occupations. 
The practices of our railways are very different from what they 
were a generation ago. The professional ethics governing the 
competitive charges of a lawyer or a physician scarcely resemble 



148 Competition. [§ 63 

those of a tradesman. The code of business morals is not 
the same in Wall Street as in Worth Street ; the competition 
of farmers is often conducted on a different level from that 
of factory owners. Each group has its own standard, and the 
average man is satisfied if he conforms to it. The object of 
all progress is to elevate this standard and to give a continu- 
ally broader interpretation of what is economically " fair." 
Conformity to the standard, however, involves some interfer- 
ence with individual liberty. Through the force of public 
opinion, reflected in business usage or legislative enactment, 
competition is being made to assume a higher form. Dishon- 
esty is frowned down, factory laws are enacted, the scab and 
strike-breaker are reprobated, unscrupulous financiering is pun- 
ished. Competition is not destroyed, but its level is raised. 

(2) The second consideration is that of equality. Perfect 
equality indeed does not exist, since variety is the law of life. 
Competition does its work, in the economic as in every other 
field, precisely by giving the victory to the better equipped. 
When the disparity between the competitors, however, is enor- 
mous, the community often fails to reap the essential benefits of 
competition. If one individual can produce a commodity for 
ten cents, and if it costs his sole competitor fifty cents, a sell- 
ing price of forty-five cents will give him the command of the 
market ; whereas with a more capable group of competitors he 
might be compelled to reduce the price to fifteen cents. The 
greater the equality between the competitors, the more sub- 
stantial are the gains to the consumers. If the producer can 
in some way be rendered more efficient, so that the disparity 
will diminish, to that extent the community will gain. This 
is also, as we shall see, the principal argument in favor of the 
regulation of international competition through a protective 
tariff". In the same way the demand for a minimum wage 
and some of the other legitimate practices of trade-unions 
are intended to bring the weakest nearer the standard of the 
strongest. In its best aspects it is a levelling up, rather than 
a levelling down. 



§63] Limits of Competition. 149 

The point to be emphasized is that the strengthening of a 
weak competitor may redound to the advantage not only of 
the competitor himself, but to that of the whole group, and 
ultimately to that of the community. Competition remains, 
but is rendered less unequal. Here, as elsewhere, indeed, 
there is always the danger that the community may suffer 
more from the restriction on the strong than it gains from the 
advantage to the weak. This, however, is the danger of all 
democracy, which must be guarded against in other ways. 

(3) The third point is the existence of quasi-public enter- 
prises. Shortly after the so-called " merger decision " of the 
Supreme Court in 1904, in which the Northern Securities 
Company was declared illegal, a noted lawyer stated publicly 
by way of criticism that no one any longer believed in the old 
adage that " competition is the life of trade." This remark 
rested upon a confusion of thought. Competition of a certain 
kind between railways is certainly not the life of trade. But 
why? Railways, like some other media of transportation and 
transmission of commodities, intelligence and power, differ 
from ordinary commercial enterprises in that they are quasi- 
public in nature. They carry on enterprises in which the 
public interest is so commanding that it must not be subordi- 
nated to private profit. In ordinary private business buyers 
and sellers make their individual bargains with each other ; 
and while, as we shall see, open competitive prices tend to 
uniformity, there is nothing to prevent the more powerful or 
the more favored purchaser from secretly securing a lower 
price. Much of the profit of the business man, indeed, con- 
sists in this skill in purchasing on favorable terms ; the very 
essence of usual business practice is this system of different 
prices to different customers. It is precisely the attempt on 
the part of railways to pursue this same policy which has cre- 
ated the " railway problem " in the United States. It is now 
recognized that the railway has no more right to make per- 
sonal discriminations between its customers than has the 
government post-office. The wealthy merchant cannot buy 



150 Competition. [§64 

postage stamps cheaper than his smallest competitor ; he 
ought not to be able to secure more favorable freight facili- 
ties. Competition in ordinary business means the different 
treatment of individuals, and is beneficial; competition in 
railway rates means discrimination between shippers, and is 
reprehensible. Competition in ordinary prices is the soul of 
trade ; competition in railway rates is the death of legitimate 
trade. The only kind of competition that is desirable in 
quasi-public enterprises is the competition of service and of 
facilities. 

Competition therefore is a force that must not be abused. 
It is applicable only in a slight degree to certain kinds of 
business, it works most beneficially in the presence of com- 
parative equality, and its level of action stands in need of 
a continual elevation. Within these limits, and with these 
conditions, it is a vital and salutary force. 

64. Substitutes for Competition. 

As opposed to competition there are three possible regula- 
tors of economic phenomena, — custom, co-operation and 
monopoly. 

(i) Custom at one time played a far greater role than 
it does to-day. In the more immobile communities of the 
Orient, as well as in the early middle ages of Europe, society 
was largely governed by status rather than by contract. 
People were born into certain conditions and occupations, 
and to emerge from these was difficult or impossible. In 
the rigidity of the Indian caste system we see the highest 
development of custom. Prices also were largely customary 
prices ; the entire mediaeval conception of jiistum pretitim 
centred in the attempt to enforce the customary price. Cap- 
ital was to a great extent fixed in land, and thus immo- 
bile ; labor was not permitted to shift at will from place to 
place or from trade to trade. Nevertheless, even in the stage 
of the customary economy competition was not entirely ab- 
sent. At bottom values were far more dependent upon the 



§ 64] Substitutes for Competition. i 5 1 

working out of subtle and masked competitive forces than 
is usually conceded. To-day custom still plays a perceptible 
although fast-dwindling role in the determination of some 
economic phenomena. Even in the backward and primitive 
sections of our country the storm and stress of modern com- 
petitive life are making rapid inroads. The economic theory 
of industrial society now rests on competition, not on custom. 

(2) Co-operation is in some aspects the opposite, but in 
others the corollary, of competition. We have seen that from 
the very beginning there was mutual aid within the group, in 
order the better to carry on the competition between the 
groups. There is even to-day no competition within the fam- 
ily, although a very lively competition between families. So in 
the same way the stockholders of a corporation co-operate, in 
order the more effectively to compete with another corpora- 
tion. There are in fact all kinds of associations, voluntary 
and compulsory, including church and state, which fill out 
modern social life and which have more or less economic 
influence, working in perfect harmony with the struggles of 
the market. This kind of co-operation is compatible with 
competition. 

Co-operation in its technical sense, however, means the 
abandonment of competition in distribution and in production. 
In distributive co-operation, the customers who are members 
of the co-operative societies select one of themselves as man- 
ager of the store and share any resulting profits. As they are 
expected to make no purchases elsewhere, there is no compe- 
tition. Such co-operative stores are found principally in Great 
Britain. They have never flourished in America because they 
have been unable to supply the commodities as cheaply as the 
great department stores. In productive co-operation the ob- 
ject is to eliminate the capitalist and to remove competition 
between the workmen. The laborers elect one or more of 
their number to control the enterprise, and divide among 
themselves the gains. Co-operative production has achieved 
some notable triumphs in both Europe and America, but as 



152 Competition. [§64 

we shall see (§ 184), its scope is exceedingly restricted, and 
there are great obstacles to its general adoption as a substitute 
for competition. 

(3) While co-operation implies an abandonment of compe- 
tition either between consumers or between laborers, there is a 
third form of co-operation which implies abandonment of com- 
petition among capitalists or managers of business. This is 
usually called combination. If the combination is incomplete, 
however, it is still subject to the force of competition ; if 
it is complete, it has become a monopoly. Monopoly there- 
fore is the ultimate outcome of the cessation of business 
competition. 

Monopoly has existed in many forms, and there are accord- 
ingly several categories of classification. Monopolies are either 
private or public, and public monopolies are either fiscal or 
social. Fiscal monopolies are enterprises conducted by gov- 
ernment for fiscal reasons, like the salt or tobacco monopoly 
abroad. Social monopolies are enterprises conducted by 
government primarily for social reasons, like the federal 
post-ofifice, or the South Carolina dispensary system. Private 
monopolies, on the other hand, are of three classes, — personal, 
labor and capital monopolies. Personal monopolies rest upon 
natural talent ; a great actor or musician is in a class by him- 
self. Labor monopolies rest upon labor organization and 
affect chiefly the employer, although indirectly the public. 
Capital monopolies are the ones with which the consumer in 
general usually comes into contact. 

Capital monopolies, finally, are of four kinds, — legal, natural, 
franchise and ordinary business monopolies, (i) Legal mo- 
nopolies were at one time common, through grant of the 
monarch to favorites. They are to-day found only in the 
restricted form of patents and copyrights. (2) Natural mo- 
nopohes are those which depend on natural location, as in 
the case of certain specially favored lands, mines or waters. 
(3) Franchise monopolies take the form of quasi-public en- 
terprises like railways, telegraph and telephone companies, 



§64] Substitutes for Competition. 153 

gas, water and electric light companies, whose profitable oper- 
ation depends on the grant of a franchise to use the public 
highways, on, above or below the surface. Strictly speaking, 
they might be classed as a subdivision of natural monopolies. 
Here experience shows that competition is in the long run 
impossible and undesirable, either because, as in the case of 
railways, it leads to discrimination, or because, as in the case 
of the so-called municipal monopolies, it leads to an unen- 
durable interference with the streets or an unnecessary dupli- 
cation of plant. (4) Ordinary business monopolies, finally, 
cover the great mass of modern enterprises known as trusts, 
and as to the essential monopolistic character of which there 
is room for doubt, as will be explained later (§ 149). 

It is clear that private monopoly is a satisfactory regulator 
of price only in personal monopolies, where the consumer is 
glad to recognize and to foster exceptional talent, as well as in 
patents and copyrights where society is willing for a time to 
forego the advantage of competition for the sake of stimu- 
lating invention, and thus ultimately reaping the benefits. In 
all other cases of private monopoly, the consumer is to a cer- 
tain extent at least left defenceless. Where there is no reliance 
upon competition, recourse must be had to some form of legis- 
lative control. Unregulated monopoly can therefore only in 
most exceptional cases be a substitute for competition. 

Competition hence remains the permanent and controlling 
force of economic society. It is not all pervasive or uniformly 
advantageous. But in its fundamental aspect it lies at the root 
of progress, and when stripped of its excrescences and applied 
under proper limitations it is as beneficent as it is widespread. 
In the complex society of the present day, however, the limi- 
tations on the principle often assume almost as much impor- 
tance as the principle itself. 



CHAPTER XL 
FREEDOM. 

65. References. 

H. J. Nieboer, Slavery as an Industrial System (1900) ; J. K. Ingram, 
History of Slavery afid Serfdom (1895) ! J- E. Cairnes, The Slave Power 
(1862) ; T. H. Green, Liberal Legislation and Freedom of Contract in 
Works (Nettleship's ed., 1888), III ; J. F. Stephens, Liberty, Equality 
and Fraternity (1873) ; H. C. KA2LXVi%, Economics and Jtirisprudence (Am. 
Econ. Assoc, Economic Studies, II, 1897) ; A. B. Hart, Slavery and Aboli- 
tion (Am. Nation, XVII), Actual Gove7-nmetit (Am. Citizen Series), § 196; 
A. T. Hadley, Freedom (1903), chs. iii, iv, vi; R. T. Ely, Studies in Evo- 
lution of Industrial Society (1903), part 2; E. Kelly, Goziernfnent (1901), 
II, bk. i, ch. v; J. S. Nicliolson, Principles, bk. v, ciis. ii, iii, and Strikes 
and Social Problems (1896), chs. iv, vii ; J. S. Mill, Prittciples (1880), bk. v, 
ch. x; S. and B. Webb, Industrial Democracy (1904), part 3, ch. iv, and 
Problems of Modern Iiidicstry (1898), ch. x ; D. G. Ritchie, The Principles 
of State Interferettce (1896) ; H. Rashdall, The Rights of the Individual 
(Econ. Rev., VI, 1896) ; G. G. Groat, Trade Uniotts aitd the Law in Neiv 
York (Columbia University Studies, 1905), ch. xi ; Peace with Liberty and 
Justice (Addresses at the meeting of the National Civic Federation, 
^9°5) j J- K.- Commons, Immigration and its Economic Effects (Indust. 
Commiss. Report, XV, 1902); Turner, Chinese and Japanese Labor in the 
Mountain and Pacific Coast States (ibid.) ; Report and Recommendations 
on Immigration, ibid., XIX, 1902, 957-1030; various articles on Immi- 
gration in American Academy of Social and Political Science, Annals, 
XXIV (1904), 151-239; Conference of the National Civic Federation, on 
Immigration, 1905. 

66. Origin and Growth of Slavery. 

Industrial liberty, like private property, is the result of a slow 
evolution. The ordinary picture of the freedom of the un- 
tutored savage is as fanciful as the rest of the fairy tales of our 
youth. Primitive man lacked freedom in three ways : he was 
in abject dread of nature, of his stronger comrades, and of the 

154 



§66] Growth of Slavery. 155 

social group. In his ignorance of natural phenomena he was 
a prey to all kinds of fear and superstition and an easy victim 
of the sorcerer or medicine man. Living in a society based on 
brute strength, he was at the mercy of the more stalwart savage. 
Dependent, as we have seen, on the horde or clan for existence, 
he was hemmed in by social customs that could not be in- 
fringed and by group prohibitions which it would be folly to 
evade. Civilization, and not primitive nature, is the creator of 
liberty. Knowledge has emancipated man from superstition, 
law and order have protected him from the oppressor, social 
progress has evolved in every phase of life a sphere of liberty, 
ever more secure from the encroachments of absolutism. 
Economic liberty like political liberty, freedom of thought like 
freedom of speech, are the product of the most advanced 
stages of society. 

The freedom which is of special concern to the economist is 
of two kinds: bodily freedom as the basis of all labor, and 
freedom of economic action apart from control of one's own 
labor. The first involves personal liberty in the narrower 
sense and leads to a study of slavery. The second comprises 
a number of phenomena to be discussed in § 69. We take up 
first the subject of slavery. 

The origin of slavery has until recently been much mis- 
understood. It is commonly stated that there are four causes 
of slavery : conquest, debt, crime and birth. Slaves, we are 
told, were recruited from the victims of war ; from the ranks 
of those that voluntarily sold themselves or were unable to dis- 
charge their debts ; from the criminals who earned a punish- 
ment only short of death ; and from the offspring of existing 
bondmen. This statement is accurate enough, but it sheds no 
light on the real problem of the. origin, the spread and the 
decline of slavery. 

Slavery is obviously an institution designed to secure the 
services of others by force. It presupposes the need of labor 
on a moderately large scale. In the earliest stages of society 
Avell-nigh the only work done by man consists of hunting and 



156 Freedom. [§ 66 

fishing, each in itself to a great extent a pleasurable activity. 
Every member of the community concerns himself with such 
work, and there is neither need nor room for compulsory labor. 
It is only when private property develops that we find the 
beginnings of slavery. In exceptional cases we can trace pri- 
vate property and intertribal barter among fishing groups, as 
in some of the Indian tribes on the North Pacific coast. Here 
the slave is utilized to a certain extent in work connected with 
fishing and in domestic labor. In general, it may be said that 
slavery can exist in the primitive economic stage only when 
subsistence is easy to procure without the aid of capital. 
When this condition is lacking, as among the Australians as 
well as among the great mass (although not all) of the Ameri- 
can Indians and the Eskimos, slavery is unknown. 

As we have seen, however, private property acquires social 
importance only with the pastoral stage. The slave can now 
be employed as the cowherd, the swineherd, the shepherd. 
The patriarchal family develops, and the slave becomes an in- 
tegral part of the family group. Slavery, however, is still rela- 
tively insignificant. Even large flocks and herds can be tended 
by a few herdsmen, and the existence of a great mass of 
poverty-stricken freemen renders recourse to slaves unneces- 
sary. The accumulation of large numbers of domestic slaves, 
moreover, is prevented by the exigencies of a roving existence. 

When we come to the agricultural stage, the conditions 
change. Cultivation of the soil is arduous, and yet with an 
adequate force of laborers it is profitable. On a given plot of 
land every additional laborer means up to a certain point an 
increased yield ; the existence of settled habitations renders 
possible the employment of domestic servants in various 
capacities. The more slaves, the more wealth and ease for 
the slave owner. 

In the early stage of the agricultural period slavery is still 
relatively inconspicuous. After the immediate needs of the 
master and his family have been met there is little use for 
additional laborers. It is only with the growth of barter and 



§66] Growth of Slavery. 157 

the increasing possibility of surplus products that it becomes 
profitable to augment both one's land and one's slaves. In 
other words, a market for agricultural production must develop, 
and the landed estates must be managed as business enter- 
prises. Slavery becomes highly lucrative, and on the great 
estates there is now such a diversified activity that large 
numbers of slaves are employed not only as domestics but in 
all kinds of industrial work. Thus in Rome the development 
of slavery on an extended scale did not take place until the 
later centuries of the republic, when slavery on the latifundia 
became the dominant form of great business enterprise. In 
the same way slavery became an important factor in America 
only when the cultivation of tobacco and later of cotton on a 
considerable scale for the foreign market made the labor of slave 
gangs profitable. 

It will be observed, however, that in addition to the exist- 
ence of a market one other factor is necessary to the spread of 
slavery. This is a supply of free land. It is only when there 
are large tracts of virgin and unoccupied soil that slavery be- 
comes at once lucrative and, from the point of view of the 
landowner, necessary. It is obvious that if any one can occupy 
and till on his own account a plot of land he will not vol- 
untarily work for others, except for a remuneration so large 
that it will exceed what he himself can raise from the soil. 
The landowner who cannot secure voluntary assistance ex- 
cept on what he regards as ruinous terms resorts to forced 
labor. As long as there is a boundless expanse of good land 
available, slave labor, which implies a superficial cultivation, is 
still economical. It pays better to bring fresh land under the 
plough than to put more effort into old land ; it is more profit- 
able to increase acreage than to redouble effort. Even when 
the land becomes poorer through an exliaustive culture, slavery 
is still profitable in the older sections, not so much for the 
raising of produce as for the raising of slaves to be sold to the 
newer and more distant lands. To the landowner it is imma- 
terial whether he secures his wealth from the produce of land 



158 Freedom. [§ 67 

or of slaves : as long as the supply of fresh land maintains the 
value of slaves, their increasing numbers will counterbalance 
the decreasing fertility of his land. Finally, when slavery has 
become the dominant factor in production, it is profitably 
employed not only in agriculture, but also in industry. 

Thus in classic Greece slavery developed with the growth of 
intermunicipal markets, and grew strong with the expansion of 
the colonies on all sides of the Mediterranean. The great 
city-states became not only the chief marts but also the chief 
breeders of. slaves, and slavery finally dominated industry as 
well. With the advent of Roman sovereignty slavery received 
a new lease of life, and became lucrative not only on the 
Italian mainland but in the great stretches of subjugated states. 
As long as the career of conquest and fresh accessions of 
territory continued, slavery flourished. In the same way the 
European immigrants into the new world, whose ancestors had 
just seen the last vestiges of forced labor disappear at home, no 
sooner reached American soil than they introduced in all its 
rigor the ancient system of slavery. If the system dominated 
only agriculture and not industry, it is to be ascribed to the 
fact that a controlling industrial civilization had, for reasons to 
be noted in a moment, evolved from the stage of slavery to that 
of freedom, first in Europe as against the colonies in general, 
and then in the North as against the South. It was cheaper 
for the South to buy its industrial products in the free North 
or in Europe than to make them herself. 

67. Decay and Disappearance of Slavery. 

To the same cause, the conditions of supply of fresh land, 
must we ascribe the decay and the final disappearance of 
slavery. When the supply of new land diminishes, the eco- 
nomic disadvantages of slavery make themselves apparent. 
As Cairnes pointed out, there are three defects in slave labor : it 
is given reluctantly, it is unskilful, it is wanting in versatility. 
As long as there is an ample supply of exuberantly fertile soil, 
superficial cultivation suffices. But with every decade's culti- 



§ 6;] Decay of Slavery. 159 

vation of the same plot the productivity suffers and the need 
of more unremitting labor appears. The landowner now finds 
it to his interest to mitigate the rigors of slavery and by per- 
mitting the cultivator to do some work on his own account to 
induce him to labor somewhat more strenuously for his master. 
The slave in Rome gradually turns into the colonus, just as 
several centuries later the Anglo-Saxon thegn is replaced by 
the villein, — the slave by the serf. Serfdom differs from 
slavery chiefly in that the individual acquires certain personal 
rights and is attached to the soil. He goes with the land, but 
cannot be divorced from it. The serf is still bound to work a 
certain part of his time for the landlord. With the final ex- 
haustion of free land, however, the landlord finds that he can 
derive more profit by freeing the serf completely and by letting 
him occupy the land on a fixed rental, in produce or in money. 
This process is gradual, differing according to the general 
economic conditions of each country. Ultimately, however, 
the last trace of serfdom disappears, and the cultivator becomes 
the hired man or the free tenant farmer. 

There are generally five steps in this transition from slavery 
to liberty : (i) the acknowledgment by the master of certain 
personal rights on the part of the slave ; (2) the grant to the 
slave of certain property rights, as the privilege of the Roman 
slave in later times to acquire a pecii/imn or independent fund 
by working in his leisure moments for himself; (3) the con- 
ferring of the privilege of marriage, whereby the master ab- 
dicates the right of breeding human beings like animals ; (4) 
the manumission of the slave, while reserving certain partial 
rights to his services; (5) complete emancipation and com- 
mutation of all services into a fixed money rental. 

The transition from slavery to serfdom and from serfdom to 
freedom can be traced in Western Europe, where the increase 
of population and the resulting diminution of fresh land forced 
the adoption of better methods of cultivation. The process 
was accelerated by the growth of a free industry and com- 
merce in the towns; and although temporary mutations 



i6o Freedom. [§ 67 

caused the landowners here and there to resist emancipation, 
serfdom was finally abolished, either because it was no longer 
really profitable, or because the community now recognized 
the greater need and value of the free industrial workman. 
In the first case, as in England, serfdom died a comparatively 
quiet death ; in the second case, as on the Continent, where 
the landowners were more tenacious of their rights, it needed 
a revolution to bring about the disappearance of the last traces 
of serfdom. 

In America, where at first only the fringe of the arable area 
was occupied, the resulting inability to secure an adequate 
labor force through free workmen, apprentices or redemp- 
tioners soon led to the adoption of slavery, first of Indians, 
then of negroes. In the Northern states, where the land was 
poor and a better cultivation necessary, slavery never took a 
deep hold except on the plantations of Narragansett Bay and 
of the Hudson valley. In the South both climate and soil 
made slavery profitable. As the seaboard lands became 
poorer, the continuance of slavery depended on the continual 
acquisition of fresh lands, — a fact that led to the Mexican war 
and the attempts to secure Cuba. The opening of the lower 
Mississippi valley so augmented the price of slaves that not 
only the older seaboard states, but even many of the hill sec- 
tions of the interior commonwealths where slavery would never 
have developed of its own accord, now found it to their inter- 
est to raise slaves for the market ; and from that time the 
entire South was practically a unit in favor of the "peculiar 
institution." The South was forced into the conflict because 
it well realized that without fresh supplies of land slavery was 
doomed. 
/ Emancipation came as a war measure ; but even without 
emancipation at that time slavery would soon have disappeared. 
Left to itself, without any chance of territorial expansion in 
the presence of a more vigorous and free industrial system, 
slavery would slowly have become unprofitable, and would 
have changed into some form of serfdom to be ultimately 



§ 6;] Decay of Slavery. i6i 

merged into the more remunerative system of freedom. Lin- 
coln's proclamation, like the Czar's ukase of the same decade, 
accomplished by a stroke of a pen what it had taken Western 
Europe centuries to attain. In America the transition was an 
economic revolution, in Russia a reform, because in the one 
country slavery, and in the other serfdom, was abolished. In 
both cases the change in the law only slightly anticipated the in- 
evitable result of a fast-approaching change in the economic facts. 

The disappearance of slavery is therefore not due primarily 
to moral teachings. The greatest moral philosophers of Greece 
defended slavery because they could not conceive of a social 
system without it ; the clergymen of the South honestly ap- 
pealed to the Bible because in their opinion it was necessary 
to social stability. The ethical defects of slavery were men- 
tioned by many Roman writers, but it was not until its eco- 
nomic shortcomings were realized by teachers and public 
alike that slavery disappeared. The civil war was indeed 
borne on the waves of a great moral uprising, but human 
nature in the North was no different from that in the South, 
and had the climatic and economic conditions of the North 
been like those of the South, there would have been no such 
moral uprising. A higher morality, it is true, continually trans- 
forms social life, but in order to accomplish lasting results it 
must be in intimate touch with the great underlying economic 
facts. 

With the virtual exhaustion of free land, slavery in modern 
society has gone, never to return. It is only in a few of the 
tropical colonies where land is still abundant that there is any 
possibility of its continuance ; and if the colonies did not form 
so relatively insignificant an appendage of modern industrial 
states, the possibility might become a probability. It is un- 
likely that we shall see anything more severe than the carefully 
regulated contract labor of some of the English possessions. 
Even here, however, as well as in the case of the "culture " sys- 
tem of Java and the peonage of Spanish America, care must be 
taken not to permit a relapse into a state of virtual serfdom. 

II 



1 62 Freedom. [§ 67 

Slavery and serfdom have been defended on five grounds. 
( I ) It is claimed that slavery is preferable to cannibalism ; that 
it is a great advance to spare the victim rather than to eat him. 
It is forgotten, however, that when the great development of 
slavery came, the enslaving part of mankind had long passed 
out of the cannibal stage. (2) It is contended that slavery 
protects labor, and that in the middle ages, for instance, pro- 
tection was more important than freedom. This is, however, 
an assumption which from the point of view of the workman 
cannot be proven. (3) It is said that slavery inculcates the 
habit of work. There is no doubt that some of the negroes 
were drilled into comparative thrift and orderliness in the 
South. But this assumes that nothing else would effect the 
same result, — an assumption belied in all countries where free 
labor has developed independently. It also forgets that some 
of the negroes came from tribes where work was by no means 
unknown. (4) It is asserted that slavery permits the evolution 
of a leisure class. This, again, is based on aristocratic postu- 
lates. It completely ignores the possibility of a democratic 
development where leisure and culture will no longer be the 
possessions of a favored few. (5) Finally, it is claimed that 
compulsory labor is necessary for the economic progress of 
countries where the natives will not work. This argument 
overlooks the fact that the ultimate end of economic progress 
is man rather than wealth, and that every resource of modern 
civilization in the line of industrial and technical education 
must first be exhausted before the claim can be admitted. 
Labor is indeed necessary for economic progress, but a so- 
called progress which rests on the perpetual exploitation of the 
laborer is not worth having. Slavery, whether total or partial, 
exerts its pernicious and insidious influence on slave and 
slaveholder alike. The modern conscience refuses to permit 
it, and fortunately the economic facts are almost everywhere in 
harmony with the modern conscience. These economic facts 
rest on the disappearance of free land. 



§ 68] Economic Liberty. 163 

68. Liberty of Economic Action. 

While bodily freedom is thus the result of a slow develop- 
ment, the liberty of economic action in general is also a recent 
product. Economic liberty of both kinds has been evolved 
because it has been recognized as conducive to wealth and 
general progress under modern conditions. As opposed to 
the theories of ancient and mediaeval absolutism, with its con- 
tinual interference in the economic life of the individual, the 
modern doctrine is that a man may commonly be depended 
upon for utilizing his opportunities and turning his energies to 
the best account ; that an adult of sound mind usually knows 
what is most advantageous for him, and that in making the 
most effective use of his own abilities he will ordinarily do the 
best for the community. It involves the substantial identity 
of private interest and public welfare, and it is to-day almost 
everywhere in the civilized world either an accomplished fact 
or a cherished ideal. 

If we look more closely, however, we shall find that free- 
dom is more than the mere absence of restraint or interference. 
In contrast to this mere negative conception of liberty, as 
advanced by Spencer and adopted by the average man, we 
must put the positive conception as framed by Green and 
elaborated by recent thinkers. Economic freedom, like all 
liberty, is not an attribute of primitive man, but has been ham- 
mered out by centuries of toilsome effort. Individual liberty is 
the product of social effort. If it is to be a constructive rather 
than a destructive force, if it is to minister to social progress 
rather than to social dissolution, it must be accompanied by 
two other conditions. 

Of these the first is equality. By equality we do not mean 
absolute equality. A certain degree of inequality inheres in 
the nature of things. Men are born with an inequality of 
physical, mental and moral attributes which no amount of care 
can eradicate ; and as soon as private property develops, these 
natural inequalities inevitably produce their results in inequality 



164 Freedom. [§ 68 

of possessions. The real equality that is important for eco- 
nomic purposes is threefold : first, legal equality, or the cer- 
tainty that one man is as good as another before the law, 
and that his economic rights will be equally protected ; sec- 
ondly, equality of opportunity, in the sense that no man .s shut 
/ out by legislation or social prejudice from free access to any 
vocation or employment for which he deems himself fitted ; 
thirdly, such a relative equality, at least in the conditions of 
bargaining, as not to put one party to the contract at the vir- 
tual mercy of the other. Without such a threefold equality 
freedom becomes illusory ; for liberty based on gross inequahty 
means the liberty of the stronger and more unscrupulous to 
impose his will on the weak. Liberty without equality is the 
power of the one, but the subjection of the other. The liberty 
to invest one's capital in slaves was stoutly defended by the 
ante-bellum Southerner, but his liberty involved the other's 
slavery. 

In addition to equality the growth of competition and the 
complexity of modern economic life have brought into promi- 
nence a second condition of liberty. The enormous power 
exerted to-day by the accumulations of capital as well as by the 
combinations of labor is in the present state of human devel- 
opment peculiarly susceptible of abuse. These abuses may be 
within the margin of the law, and yet none the less socially 
, reprehensible. Unless great power is tempered by responsi- 
bility, it is apt to run wild. We are beginning to hear of the 
responsibilities of wealth, but the adage noblesse oblige applies 
to all forms of economic power, whether represented by wealth 
or not. What is needed, and what is gradually being devel- 
oped, is the sense of social solidarity ; in other words, the 
conviction that no one can really dissociate himself from the 
welfare of his neighbors, and that his every action must be 
judged by its influence on society at large. It was this idea 
that found vague expression in the " fraternity " of the French 
revolution ; it is the same idea that is again more forcibly 
advanced to-day under other names. The application in the 



§ 69] Kinds of Economic Freedom. 165 

economic sphere is no less valid than in others. Liberty 
without responsibility is license. 

Real economic liberty, therefore, is constructive in that it 
implies not simply an absence of restraint, but such a positive 
complex of conditions, resting on law and custom, as to insure 
to the greatest possible number the opportunity of a free 
development of their faculties. Liberty, when based on equal- 
ity and responsibility, means wealth for the hidividual and 
progress for society ; liberty without equality and responsibility 
may mean advance for the few and retrogression for the 
many. Liberty as a negative concept is disruptive ; liberty 
as a positive concept harmonizes society and the individual ; 
the one is a menace, the other an aid, to lasting economic 
progress. 

69. Various Kinds of Economic Freedom. 

(i) The first and most obvious form of freedom is that of 
marriage and divorce. Marriage indeed is far more than an 
economic contrivance, even though the historical forms of 
marriage have been influenced by economic forces to a greater 
extent than is commonly recognized. Freedom of marriage 
especially is a product of the modern economic life. Restric- 
tions on the right of marriage were in the middle ages an 
attribute of personal subjection, and were utilized as fiscal 
resources by the lord. Even with the advent of physical free- 
dom, however, we find the right of marriage dependent on 
certain property qualifications, as in Southern Germany at the 
beginning of the nineteenth century. This also was merely a 
survival of aristocratic traditions, — like the still existing prop- 
erty qualifications for marriage in the case of army officers in 
continental Europe. Freedom of divorce, on the other hand, 
existed in early society, but was at first based on inequality. 
After the patriarchal and modern family had been constituted 
the husband could divorce the wife, but not vice versa. The 
newer right of divorce which rests on equality is in large 
measure the result of the economic emancipation of woman. 



1 66 Freedom. [§ 69 

Into the wider ethical and religious aspects of this great 
problem the present is not the place to enter. 

(2) Next we have freedom of movement. In the middle 
ages the right of internal migration was often restricted. 
Under the settlement laws in England, for instance, it was 
virtually impossible for a workman to leave his native parish. 
In modern times the growth of freedom has brought the right 
not only of internal but of international migration. The 
restrictions on emigration still existing in Russia, for instance, 
are a relic of medisevalism. On the other hand, the prohibition 
of immigration which is sometimes found in modern countries 
must be judged in the light of liberty in the positive sense, as 
explained in the preceding section. Chinese immigration into 
the United States, for instance, is forbidden. Cheap Chinese 
labor would undoubtedly help in developing the resources of 
the Pacific slope ; but the vital objection to it is the permanent 
inequality between the Chinese and the American workman. 
Immigration in general is to be welcomed in a young coun- 
try like America with relative underpopulation, because even 
though the standard of life of the immigrant may be lower 
than that of the native, he or his children will soon reach the 
American level. The Chinaman, however, refuses to assimilate, 
and will not adopt American methods. He retains and per- 
petuates his lower standard, and thus, if present in sufficient 
numbers, would inevitably drag the American standard down to 
his own level. Freedom of immigration, which in this case 
means prosperity for the employer and comparative comfort 
for the immigrant, implies permanent degeneration for the 
American workman and thus ultimate economic decay. It is a 
specious liberty, because based on inequality. 

When, however, there is any prospect of speedy equality and 
the immigration is not artificially fostered by foreign govern- 
ments or interested transportation agencies, interference with 
the freedom of immigration is uneconomic. This was the 
error of the Know-nothings in the fifties, as it is of the anti- 
immigrationists at present in the United States. That the low- 



§ 69] Kinds of Economic Freedom. 167 

class immigrant is the chief source of supply of the sweat-shops 
and in many respects complicates the labor problem is un- 
doubtedly true and ominous. The remedy, however, consists 
not in abolishing immigration, or even in restricting it ma- 
terially, but in raising the standard of pay and conditions of 
work through labor organization, public opinion and legal en- 
actment, and in making this possible by increased production 
and successful enterprise. In a country, indeed, where the 
labor market is already overstocked, the force of this argu- 
ment will be much impaired. But the time has not yet come 
in the United States when the immigrant in general is to be 
shut out or his advent materially restricted. 

(3) We come next to the freedom of occupation. The 
right of choosing one's profession was in former times hedged 
in by all manner of barriers. At its worst the system of caste 
and custom prevented progress because it put men into voca- 
tions for which they were not fitted. Freedom of occupation 
insures as far as possible the right man for the right place, and 
this leads to enhanced production and better distribution. 
The only restriction which modern society permits is the evi- 
dence of fitness, in those occupations where incompetence 
would imply irresponsibility and involve injury to others as well 
as to oneself. The certificates required from doctors, dentists, 
engineers, plumbers, pilots and the like are not a hindrance, 
but an aid, to true liberty. The apprenticeship regulations of 
the trade unions, however, are sometimes good, sometimes bad. 
Where they are designed to insure good work, or even to pre- 
vent the degradation of wages and the workman's standard of 
life through the irruption of large numbers of underpaid ap- 
prentices, there is much to be said for the practice. But when 
the object is simply to keep out competent workmen and to 
erect a monopolistic closed corporation, as in the late stages 
of the guild system, the limitation is clearly indefensible. 

(4) Another kind of freedom is the freedom of association. 
The chief forms of association for economic purposes are com- 
binations of labor and combinations of capital. In classic 



1 68 Freedom. [§69 

Rome, as in modern Russia, where both poUtical and economic 
aims were sought we find a stern repression of labor associa- 
tions. Even after the right of pohtical and rehgious associa- 
tion had been won, however, combinations of labor were 
prohibited. Under the modern factory system such combina- 
tions have assumed the form of trade unions. It was not until 
1824 in England, and considerably later in America and con- 
tinental Europe, that the prohibition was removed. The legiti- 
macy of union, as such, is now accepted because it is recognized 
that it tends to secure the real freedom of the laborer. The 
individual workman in a large factory is at a clear disadvantage 
in dealing with the employer ; the union, as we shall see 
(§ 182), restores the equality by securing the right of collective 
bargaining. In the same way the right of free association of 
capital in the form of corporations and other combinations has 
been acquired chiefly in the past half-century. Here again, 
however, when the nominal liberty of association results in a 
" restraint of trade " or virtual monopoly inimical to the general 
interests, the community is justified in curbing its excesses 
whenever the contest involves a crass inequality or is con- 
ducted without any sense of social responsibility. The greatest 
care, however, must be observed in the analysis before the in- 
fringement of the right of association can be conceded. To 
abandon liberty because of a mere apprehended but imaginary 
inequality would be to sacrifice both liberty and equality. A 
clear case must be made out before the law should be invoked 
against the combinations of either labor or capital. 

(5) The fifth category, freedom of consumption, needs only 
a word in this place. The sumptuary laws of old which pre- 
scribed in detail what should be eaten or worn were sometimes 
well intentioned, but always mistaken. By restricting the ex- 
pansion of wants, they really checked economic progress. 
Modern society has abandoned such a system completely, and 
where it becomes desirable in the interests of the public health 
or safety to prohibit the use of certain commodities, like over- 
ripe fruit, or infected meat, or opium, the end is attained far 



§ 69] Kinds of Economic Freedom. 169 

better by a prohibition of sale, under the pohce power of the 
state, than by a restriction of consumption. 

(6) We come, sixthly, to freedom of production, including 
freedom of contract and enterprise. Here, again, the emphasis 
has been shifted in modern times. The world has outgrown 
the time-worn conception of the citizens as the children of an 
all-wise and benevolent paternal government. It has been 
realized that governments are not always benevolent and never 
all-wise, and that with the growth of capital and competition 
better results can be secured by the repeal of the complicated 
and often contradictory provisions which throttle production 
and check individual initiative. It was this that the French 
manufacturers meant when they told Colbert " laissez-nous 
faire " and thus introduced a celebrated phrase. That was 
indeed the necessary destructive process of pulling down the 
barriers which impeded progress because they checked equal 
opportunity. It has been found requisite, however, in recent 
times to modify both the theory and the practice of laissez- 
faire in order to safeguard the interests of various classes of 
society. The complex requirements of modern life have ne- 
cessitated a governmental regulation of many business enter- 
prises in behalf of producers, of consumers, of investors or of 
the general public. The difference between mediaeval and 
modern interference is to be found chiefly in the fact that the 
one sought to prevent competition while the other endeavors 
to enlarge its domain and to raise its level. The only excep- 
tion to the rule that rational modern interference is not de- 
signed to prevent competition is found in those few cases 
where competition itself becomes wasteful and inefficient. 
The modern aim, however, is always to increase liberty 
through the attainment of equality and responsibility. Factory 
laws give the operatives a fair chance ; railway regulation at- 
tempts to secure equal treatment of shippers ; supervision of 
banks, insurance companies and other corporations is designed 
to enforce financial responsibility. In all these cases interfer- 
ence is justified only as leading to a surer and greater general 



170 Freedom. [§ 70 

liberty. We have to deal with the positive, not the negative 
conception. 

(7) Finally, we have freedom of trade. This is virtually 
included under the last head, since trade is a species of pro- 
duction. It forms, however, so important a part of the subject 
that it has generally been treated separately. The modern age 
has seen the emancipation of internal commerce from mediaeval 
restrictions of all kinds. The great controversy to-day centres 
about international trade. Here, again, the general hypothesis 
must be in favor of freedom. Free trade, however, is not 
necessarily and always beneficent. If the relative inequality of 
two countries in the production of a certain commodity is 
great, free trade may hinder in the weaker country the growth 
of an industry which might become relatively profitable or even 
highly necessary. Under such conditions protection, by build- 
ing up the industry to the point where there will be a domestic 
competition, may help in creating that relative equality between 
the domestic and the foreign producer which will ultimately 
redound to the interests of the consumer as well. As we shall 
see later, however (§ 232), such a policy is defensible only 
when protection actually increases real productive efficiency, 
and when the undoubted intermediate economic loss does not 
outweigh the ultimate advantage. Only in such a case is in- 
terference with freedom legitimate, because only then is it in 
the interests of a more real and beneficent ultimate freedom. 

70. Individual Liberty as a Social Concept. 

We see, then, that in modern life liberty is a result rather 
than a cause. It does not mean simply the absence of restraint ; 
for that is license, not liberty. All social progress is the result of 
a certain restriction of the liberty of some in the interest of all. 
These restrictions are imposed by custom, by voluntary associ- 
ation, by law. Good manners and social usages which prevent 
men from doing what they like are a mark of civilization. 
Associations like the church, the clubs and business unions lay 
down rules to which each member must conform. Government 



§ 7o] Individual Liberty. 171 

enacts many laws whose wisdom is unquestioned and obedience 
to which is compulsory. In every case there is necessarily an 
infraction of liberty in the crude sense. Moreover, especially 
in industrial matters, the cry of individual liberty often becomes 
a mere shibboleth invoked by the individuals against others 
instead of themselves. The railway magnate restricts his own 
liberty by pooling arrangements, but objects to interference by 
the shipper. The slave owner wanted freedom of trade, but 
scouted freedom of man. The manufacturer demands protec- 
tion against his foreign competitor, but objects to factory laws. 
The cotton grower acclaims the rise of prices brought about 
by manipulation on the exchange, while the spinner decries 
the liberty of speculation. The factory owner joins the selling 
bureau which restricts output or fixes prices, but objects to the 
" tyranny " of the labor union. The labor union adopts pro- 
visions relating to apprenticeship, the open shop and the boy- 
cott, but opposes lockouts and trusts. The lawyer refuses to 
consort with the " shyster " and the doctor with the quack, 
because they desire to maintain the standard of their profes- 
sions ; but they sternly reprobate the effort of the trade union- 
ist to prevent the " scab " from reducing the level of his 
occupation. 

Liberty, then, must be looked at from the social as well as 
from the individual point of view. The individual has become 
what he is largely through associated effort. This, however, 
inevitably implies a certain subjection of the individual to the 
group. The liberty which is compatible with social progress 
involves the readiness of the individual to work for a common 
end. If this readiness is not voluntary, it must be developed 
by persuasion or by force. All liberty is a balancing between . 
the powers of anarchy and of tyranny. Individual freedom 
that is oblivious of the rights of others or of the best interests 
of the majority leads to an anarchy that is destructive of real 
liberty ; group restrictions that are forgetful of the possibilities 
of the individual lead to a tyranny that is equally destructive 
of real liberty. P>om the economic point of view only that is 



172 Freedom. [§ 70 

real freedom which is calculated to reconcile the greatest 
possible production in the group with the greatest possible 
consumption of every individual within and without the group. 
The liberty of one, therefore, must not endanger the economic 
progress of others. 

Just as the political interpretation of liberty is. democracy in 
government, so the economic liberty which is conducive to 
progress can exist only with a relative economic democracy. 
It implies at least economic opportunity, and opportunity 
depends on a certain degree of equality and responsibility. 
In this sense the best government is not that which governs 
least, but the one which secures the surest conditions of a 
wider ultimate freedom. Economic liberty in the last analysis 
is the result of action, not of inaction. 



Part III. 
Structure and Process of Economic Life. 

Book I. 
Value : General Principles. 



CHAPTER XII. 
THE MEANING OF VALUE. 

71. References. 

W. Smart, Introduction to the Theory of Value (1891), chs. ii-viii; J. B. 
Clark, Philosophy of Wealth (1886), ch. v, and Distribution of Wealth 
(1899), chs. xv-xvii; M. Pantaleoni, Pure Economics (1899), part i, ch. 
iv; A. Marshall, Prittciples (1898), bk. iii ; N. G. Pierson, Principles 
(1902), part I, ch. i, § 3; W. S. Jevons, Theory (1888), ch. iii; F. A. 
Fetter, Principles (1904), part i, div. A; T. N. Carver, Distribution 
(1904), ch. i; H. Sidgwick, Principles (1883), bk. i, ch. ii ; A. W. Flux, 
Economic Principles (1904), ch. ii ; E. v. Bohm-Bawerk, Positive Theory of 
Capital (1891), bk. iii, chs. i-ix ; F. v. Wieser, Natural Value (1893), 
bk. i; C. M. Walsh, Measurement of General Exchange Value (1901), 
ch. i ; H. J. Davenport, Value and Distribution (1908), ch. xvii. 

72. Original Meaning of Value. 

Value is the Latin term corresponding to the Saxon " worth." 
The fundamental idea which underiies worth is capacity to 
satisfy a want. If we need a nail, but find a broken one, we 
say that it is worth nothing, — that it is valueless, or not avail- 

173 



174 Meaning of Value. [§ 72 

able, for our purpose. Value or worth thus implies usefulness 
or utility. The nail is valueless for us ; if it " avails " nothing, 
it is of no use. Since value implies capacity to satisfy wants, 
there are as many kinds of value as there are classes of wants. 
Things have a scientific value, an aesthetic value, a religious 
value, a philosophic value, a political value and so on. The 
value with which economics has to deal is economic value, — 
a small subdivision of the whole. As this is a treatise on 
economics, we shall hereafter use the term value in the sense 
of economic value, that is, the value of anything for economic 
purposes. But just as we know (§ 2) that the economic life 
is not the whole life, so we must not confound economic value 
with value in general. When we defined economics at the 
close of section 4 as the science of value, it must be remem- 
bered that what is meant is the science not of all value, but 
only of economic value. 

Incidentally we may point out the original dependence of 
moral considerations on economic facts. A thing was at first 
" good " in the economic sense, as we still employ the phrase 
a stock of goods and commodities. The ethical use of 
good came much later. In popular parlance we still speak 
of the broken nail as " no good," without desiring to pass 
any moral judgment on it. In the same way the original 
concept of " dear " was not ethical, but economic. A com- 
modity may still be dear even if we do not love it. So also 
what is ethically precious to us was originally of economic 
importance ; we still speak of precious stones in this economic 
sense. To-day we esteem somebody, when originally we put a 
money value on him (^aestimare, from aes, money). In mod- 
ern times we appreciate a quality, but at first we set a price on 
it {ad-pretiuin) . In fact, so fierce was the struggle for exist- 
ence among the early Romans, so important for their very 
stability was the quality of bravery, that the thing of chief 
value to them, the characteristic which " availed " the most, 
was " valor," a term which has now become with us of ex- 
clusively ethical import. 



§ 73] Marginal Utility. 175 

This close connection of ethics and economics must, how- 
ever, as we have seen, not bhnd us to the fact that the real 
subject of our discipline is economic. The utility with which 
we have to deal is the economic utility, the capacity of a 
thing which we must economize in order to satisfy a want. 
The use of wliisky may be ethically reprehensible, but as long 
as men desire it, and as long as they must be economical 
with it, that is, as long as it is not a free good, but an economic 
good, whisky will have an economic usefulness, — it will be 
used to satisfy the craving for drink ; and it will have a value 
in the market. The ethical judgment of the community may 
indeed afifect the economic situation. The practice of drink- 
ing to excess may be visited with such severe social reproba- 
tion that the appetite for drink may be held in check, and 
the utility of whisky will then diminish because the desire for 
it will have decreased. The study of human wants is largely 
a matter of social psychology, and the character of human 
wants is continually being modified by moral considerations ; 
but when we are dealing with the serviceableness of a com- 
modity for satisfying want, we are operating with economic 
quantities. The economist must continually bear in mind the 
moral aspects of the situation as modifying the conditions ; 
but, the conditions once given, the economic problem is a thing 
by itself. 

As a preliminary definition, then, we may say that the value 
of anything is the expression of our estimate of its utility, 
meaning by utility its capacity to satisfy human wants. 

73. Marginal Utility — The Law of Diminishing Utility. 

It is obvious that this definition is incomplete. Iron is more 
useful than diamonds, yet diamonds are incontrovertibly more 
valuable. In what sense is value an expression of utility ? 

If a starving wayfarer suddenly spies an apple, it will have a 
supreme utility for him because it stands between him and 
death. If he finds a second apple, it will still be welcome, but 
will fill a somewhat less intense want. With every additional 



1/6 Meaning of Value. [§ 73 

apple his appetite will be more appeased, until with let us say 
the tenth apple he will reach the point of satiety and be on the 
margin of doubt whether to consume any more. The utility 
of each apple — its capacity to satisfy his desire — has di- 
minished until the tenth apple is the last which affords any 
utility at the moment. The utility of this tenth apple is 
called final because it is the final apple, or marginal because 
on the margin of desire. 

It is plain that the marginal utility of any apple depends on 
the quantity at one's disposal. The greater the quantity, the 
less keenly will he feel the particular want. If he had only 
five apples, the utility of the fifth, that is, the marginal utility, 
would be considerable because his last want satisfied would 
still be urgent. The degree of marginal utility depends on the 
strength of the want last satisfied, or, it might be said, on the 
need we have of more. 

The second point is that at any given time the utility of 
each apple is equal to that of the last and therefore to that of 
any other (of the same size and quality). If the available 
supply is five apples, any one of the five may be considered 
the marginal unit, that is, the last unit in point of time. The 
wayfarer will lay his hands on any one of the five without par- 
ticular choice ; whether he begins with one or with another is 
immaterial, because he knows that one is as good as another. 

Thirdly, in estimating the utihty of the entire supply of 
apples, we must distinguish between the total utility and the 
effective utility of the stock, that is, the utiUty which is of any 
effect when we compare given quantities of different goods. 
The total utility of a stock is obtained by adding the utility of 
each apple to that of its predecessor. It will accordingly grow 
until the point of satiety has been reached. Ten apples 
possess more total utihty than five. The effective utility of 
the stock, however, is equal to the marginal utility of the final 
unit multiplied by the number of units. The effective utility 
of four apples is four times the marginal utility of the fourth. 
The effective utility of the stock grows, but not up to the point 



§ 73] Marginal Utility. 177 

of satiety ; after a limit has been reached, it begins to decline. 
The effective utility of eight apples may be less than that of 
five, even though the total utility is undoubtedly more. 

This can be made clear when we remember that we have 
many wants and that the degree in which things satisfy our 
wants depends on their relative importance. In addition to 
apples, the wayfarer needs other kinds of food, clothing and 
shelter. If he has only five apples, his desire for them may be 
so strong that he thinks of nothing else ; but if he has eight 
apples, his desire for the apples may be overtaken by his desire 
for let us say three articles of clothing. If there were a hun- 
dred apples at his disposal, knowing that he had sufficient for 
many future meals, he would turn his attention almost entirely 
to still other needs. Air, for instance, is indispensable to life, 
but it is so abundant that it has no marginal utility at all and 
hence no effective utility, although its total utility is limitless. 
If the supply of air was shut off, however, he would abandon one 
by one his other needs, until finally his only desire would be 
for air. In other words, as long as he thinks chiefly of apples, 
which he will do as long as he can get only five, he wants all 
five ; but as soon as he thinks of other things (which he will do 
when there are say eight apples) the less will be the impor- 
tance which he will attach to the eight. The smaller the 
number of units, the more rapid will be the rise in their margi- 
nal utility. If in the case of five apples the marginal utility of 
each is five units of satisfaction, the effective utility of the stock 
will be five times five, or twenty-five ; but if in the case of eight 
apples the marginal utility falls to three, the effective utility of 
the stock will be eight times three, or twenty-four. Yet the 
total utility of eight apples is certainly more than that of five. 

It is important to note, moreover, that the word margin 
is used in two senses, or, rather, that there are two different 
kinds of margins. When we speak of the marginal use of a 
commodity to any one, we think of him as on the brink of not 
wanting any more. He may reach the margin because, with 
the diminishing utility of each increment, he will, if the supply 



178 Meaning of Value. [§ 73 

is large enough, come to the point where there will be no 
consciousness of any economic usefulness at all. The margin 
becomes a margin between the economic world and the non- 
economic world, a margin between the sphere of economizing 
and that of unconcern or waste. On the other hand, when the 
supply is limited, the diminishing utility of each increment will 
be arrested at a point below which the consumer will prefer to 
abandon the use of an increment for something else. The 
margin here is a margin of indifference between an increment 
of one commodity and an increment of another commodity. 
Since these increments are not necessarily the same, the mar- 
gin of indifference may be reached at a point where the tenth 
increment of one commodity balances the twentieth of another, 
where, in other words, the marginal utility of the one commodity 
is twice that of the other. Both marginal increments will 
still possess a positive utility. This second kind of margin is 
an economic margin, that is, a margin or border between two 
or more economic goods, not as in the first case a margin 
between economic and non-economic goods. The first kind 
of margin, where we compare different increments of the same 
thing, may be called the non-economic margin, because at the 
margin the utility is zero and the commodity is no longer an 
economic good. The second kind of margin, where we com- 
pare the same or different increments of different things, may 
be called the economic margin, because at the margin the 
utility of each thing is still measurable and appreciable. We 
shall have repeated occasion to call attention to the errors 
that result from confusing these two kinds of margins. 

To recapitulate : the utility of a commodity is called mar- 
ginal because the desire for additional quantities must some- 
time reach a limit or margin as compared with the desire for 
other commodities. There is always one unit in the supply 
which marks the margin of this desire ; and with every change 
in the supply or the desire, the margin will move up or down. 
This unit is called the marginal unit or increment. With a 
fixed quantity the utility of each unit or increment is for prac- 



§ 74] Individual and Social. 179 

tical purposes equal to that of the marginal unit, because if any 
unit were withdrawn the final unit would naturally be put in its 
place. The real loss would be the loss of the marginal unit. 

Value, then, is not simply the expression of utility in general, k- 
but of marginal utility. When we speak of the value of a com- 
modity, we think not of its usefulness in general, but of the 
utility of a definite quantity as compared with other goods ; 
and in so doing, we think not of the total utility of this quantity 
in itself, but of its effective utility, that is of the utility of the 
marginal unit multiplied by the number of units. 

74. Individual and Social Value. 

Value as a universal conception would be true of the indi- 
vidual living apart from society, if there were any such beings. 
The estimate put by the individual on one commodity as com- 
pared with another is the foundation of all value. Robinson 
Crusoe would assign a value to apples as compared to nuts, the 
value of each being in agreement with their marginal utility to 
him. As a matter of fact, however, we live in society, not on 
a desert island. Economics, as a social science, treats of the 
relation of man to man, of class to class. The value with 
which we deal is therefore the result of social forces. It is 
society as a whole which sets a value on things. Society is 
indeed composed of individuals, but it is the aggregate of in- 
dividual wants that shapes value. The want of the individual 
affects value only as it influences this aggregate. If a rich 
maniac, for instance, should offer a thousand dollars for a com- 
mon spoon for which every other person would give only five 
cents, his subjective estimate would have no appreciable in- 
fluence on the value of the spoon, and if he actually paid a 
thousand dollars, society would be justified in locking him up 
and in punishing the seller. Of course, when the supply of an 
article is limited and the desire of the individual such that the 
article possesses a peculiar utility for him, not shared by the 
rest of the community, his subjective estimate may seriously 
influence its value. This is true, however, only for the reason 



i8o Meaning of Value. [§ 74 

that because of the Hmitation of supply the subjective estimate 
of the single individual forms so large a part of the collective 
desire. To get my ancestor's watch out of pawn, I may pay 
if necessary far more than its value to any one else. The 
border between an enthusiastic collector and one with a 
" screw loose " is sometimes a narrow one. Ordinarily, how- 
ever, the desire of any one individual forms only an insignifi- 
cant part of the collective desire. 

Value, therefore, depends upon the fact not only that each 
individual measures the relative urgency of his own various 
wants, but that he compares them consciously or unconsciously 
with those of his neighbors. I not only measure the relative 
satisfaction that I can get from apples or nuts, but the quantity 
of apples I can get for the nuts depends on the relative es- 
timate put upon both by the rest of society. If an apple is 
worth twice as much as a nut, it is only because the group that 
uses both apples and nuts finds, after comparing individual 
preferences, that the desire unsatisfied by the lack of an apple 
is twice as keen as that unsatisfied by the lack of a nut. 
Value, therefore, is not merely the expression of marginal util- 
ity ; it is the expression of social marginal utility. 

This serves to explain how a thing which has no direct 
utility to the individual may yet possess a value for him. If 
by chance I secure a locomotive, it is in itself useless to me. 
If, however, I can dispose of it to a railroad company, it acquires 
a value, because in other hands it will serve a social purpose. 
The locomotive now has an indirect utility for me because 
through it I can secure things of direct utility. Its indirect in- 
dividual marginal utility to me is the result of its direct marginal 
utility to the community, that is, to that part of the community 
where marginal comparisons are made between locomotives and 
other goods. Of all the valuable things in existence only an 
infinitesimal fraction possesses any direct utility for any one 
man ; yet the more of them any one has, the richer he is, pro- 
vided he can dispose of them to others. Thus, while social 
utility is made up of a combination of individual utilities — that 



§ 74] Individual and Social. 1 8 1 

is, while a thing cannot be useful to society unless it is useful to 
the individuals that compose society — the indirect marginal 
utility of a thing to any individual is the result of its social 
marginal utility. To a member of society the indirect mar- 
ginal utilities form the chief element in value. Hence in 
society the individual marginal utility which controls value may 
be said to be the reflection of social marginal utility. Our 
readiness to part with nuts or apples will depend not so much 
on the degree in which we as isolated individuals prize nuts as 
compared with apples, but chiefly on the degree in which other 
people prize apples as compared to nuts. This estimate is the 
controlling consideration. Value is a result of the community 
of wants. 

The problem with which we set out in the last section is thus 
solved. There are, in fact, two solutions, — one depending on 
the distinction between total utility and marginal utility, the 
other depending on the distinction between individual utility 
and social utility. As to the first, iron in the abstract is indeed 
more useful than diamonds ; but a pound of iron does not sat- 
isfy as many or as urgent wants as a pound of diamonds, and it 
is therefore not so valuable, even to an isolated individual. 
When we say that iron is more useful than diamonds, we re- 
fer to iron in the abstract. When we say that iron is less val- 
uable than diamonds, we refer to a definite quantity. It is 
therefore true that a commodity may possess more utility and 
at the same time less value than another ; but the utility to 
which we then refer is not the marginal utility. The total 
utility of eight apples is greater than the total utility of five, 
but the effective utility may be less. When the Dutch mo- 
nopolists destroyed a portion of the pepper crop to increase 
the price, the total utility of the supply fell, but the marginal 
utility, and hence the effective utility, and the value rose. 

At the same time it may conceivably happen that to any one 
individual a pound of iron may in and of itself be more useful 
than a pound of diamonds. Yet this fact will not control 
value. For the indirect utility of iron is far greater than its 



1 82 Meaning of Value. [§ 75 

direct utility, in precisely the same way that the wants of a 
community are more important than the wants of any indi- 
vidual. Even though a pound of iron may at a given moment 
be more directly useful to an individual, it is always true that a 
pound of iron does not satisfy as many or as urgent social 
wants as a pound of diamonds. When we speak of the value 
of iron or of diamonds, we refer to their social utihty, not to 
their individual utility. Or, to put it in another way, the mar- 
ginal utility of iron or diamonds to a man living in society is a 
reflex of their social utility. Therefore iron is always less valu- 
able than diamonds, because the social marginal utility of a pound 
of iron is always less than the social marginal utility of a pound 
of diamonds. Value in society is the expression of social mar- 
ginal utility. Social economics deals only with this kind of value. 

75. Value in Exchange. 

Since value is a social conception depending on a compari- 
son of divers goods, and since this comparison is ordinarily 
made in society by their transfer from man to man, it is clear 
that the value with which economics has to deal is exchange 
value, or value in exchange. Speaking roughly, we may say 
that the value of anything is what it will exchange for. Speak- 
ing strictly, we mean that the value of an article may be 
expressed in terms of any other article for which it will 
exchange. 

Earlier writers made a distinction between value in use and 
value in exchange, but they confused value in use with total or 
absolute utility. As soon as we grasp the fact that the utility 
with which economics deals is marginal utility, the old distinc- 
tion between value in use and value in exchange disappears. 
Other writers sometimes use the terms subjective and objec- 
tive value when referring to individual and social valuation 
respectively. The terms are awkward, because they obscure 
the fact that at bottom value is not an external characteristic 
of a thing, but an expression of its relation to an individual. 
Value is the result of an estimate of a quality, not the quality 



§ 75] Value in Exchange. 183 

itself. In this sense there is no objective value. It can be 
called objective only in the sense that when society attaches 
a value to a commodity it is something to which the individual 
or subjective valuation must conform in making an exchange. 

The study of Robinson Crusoe is important as reminding 
us that the foundation of value is independent of exchange. 
Strictly speaking, it is independent of exchange only as be- 
tween man and man, not as between commodity and com- 
modity or between want and want. Crusoe exchanges or 
weighs off in his mind apples and nuts, and thus gets an esti- 
mate for their value to him. " Value in use " is thus really 
only one kind of "value in exchange," although it is a pe- 
culiar kind of exchange. As soon, however, as we deal not 
with Crusoe, but with men in society, we find that not only 
does the individual as before measure one want against an- 
other, but that the satisfaction of that want depends upon the 
estimate put by other individuals on their respective wants. 
Value in individual economy always presupposes at least two 
things ; value in society presupposes in addition at least two 
men. In other words, value in society — that is, in actual 
life — is value in exchange ; and this value in exchange is 
nothing but the expression of its true value in use to the 
members of the social group, that is, of its marginal utility. 

Strictly speaking, the value of a thing exists only at the 
moment when it is exchanged for or compared to something 
else, just as the utihty of a thing exists only at the moment 
when it satisfies, or is conceived of as satisfying, a want. 
Since, however, men learn by experience to attribute utility 
to things which can gratify a want, so they attribute value to 
things which they know can be exchanged for other things. 
Thus value comes to mean exchange power, or the estimate 
of exchange power. 

It is accordingly plain that when we define the value of a 
thing as the expression of its social marginal utility, we mean 
that value is an expression of its exchange power ; for ex- 
change power is based on the comparative estimate of direct 



I 84 Meaning of Value. [§ 76 

social utility, which gives to every owner of the commodity the 
indirect individual utility that fixes value in society. As we 
can estimate this exchange power only by comparing one thing 
with another, value is sometimes, but less accurately, spoken 
of as a ratio, or a ratio of exchange. Value is indeed relative, 
but it is not a relation or a ratio ; it is an expression of our 
estimate of the relative exchange power of anything. 

76. Value and Price. 

Since value is an expression of our estimate of relative ex- 
change or purchasing power, the value of anything can be 
ascertained only by comparing it with other things. When we 
measure a commodity in terms of some one other commodity, 
we speak of price. If the value of a cow is equal to that of 
five sheep, we say that the price of a cow is five sheep. In 
civilized society we have become accustomed to measure all 
values in terms of a single commodity called money ; so that 
by price we now mean the money value of anything, — the 
amount of money for which it will exchange. 

Value and price have thus come to be interchangeable 
terms. Sometimes, however, value is used in a special sense. 
Thus we speak of a thing as selling for less than its real value, 
or of a shopkeeper charging more than it is worth, when we 
mean that the price to others in the long run will be higher 
or lower. So the department stores advertise " great values " 
when they mean that the goods are sold at exceptionally low 
prices compared to the seller's estimate of their utility to the 
public. Ordinarily, however, when we say a thing is worth 
five cents, we mean that the price is five cents. 

While the value of anything is thus virtually equivalent to its 
price, we must not confuse values in general with prices in 
general. When we conceive of a single commodity, like 
money, as a standard, we consider it as a fixed point, not 
subject to fluctuation.^ Prices hence may rise or fall with 

1 As to the difficulties that arise from fluctuations in the money stan- 
dard, see, below, § 197. 



§77] Increments of Wealth. 185 

reference to this standard. But we cannot speak of a general 
rise or fall in values, because there is no fixed point. Cows 
may rise in value as compared with sheep, but sheep them- 
selves may fall as compared with poultry, and poultry may vary 
as compared with something else. Value expresses a relation ; 
hence, if the value of some articles diminishes, it means that 
the value of others must increase. But if the price of certain 
articles falls, it does not follow that the price of other articles 
will rise. There may be a general rise or fall of prices, be- 
cause we measure prices in one commodity, money ; there 
cannot be a general rise or fall of values, because money also 
has a value.^ 

77. Value and Maxginal Increments of "Wealth. 

We have thus far spoken of value as the expression of 
social marginal utility. To be more exact, it should be stated 
that marginal utility (and hence value) depends not upon the 
commodity as a whole, but upon the marginal increments of 
wealth in the commodity. This might be called Clark's law, 
from its first formulator, Professor John B. Clark. 

To prepare the way for grasping this principle, we must call 
attention to several points. In the first place, the rapidity 
with which the utility of successive increments of a commodity 
diminishes depends largely on its combination with others. 
One scarf-pin is all a man needs, the utility of a second would 
be doubtful, a tenth would be useless. But with many cravats, 
we can use more scarf-pins. Put before the same man a finely 
cooked dinner or a loaf of bread, and not only will he enjoy 
the first more, but he will be willing to pay a higher price 
for the bread as a part of the dinner. 

Secondly, in all commodities except the simplest of a class 
there is always to be found a combination of various utilities. 
A plain deal table suffices to hold books ; one of polished 
rosewood satisfies a more refined want and possesses an 

1 When Wall Street speaks of a " general slump of values," it means 
only a fall in the prices of securities traded in on the stock exchange. 



i86 Meaning of Value. [§77 

additional utility. I may have an ample supply of boots, 
yet a new pair with golf rubbers in the sole may be desired 
for that reason alone. Each new utility in an object practi- 
cally makes it a new object. All commodities are virtually 
made up of such combinations or bundles of utilities. 

Thirdly, the marginal increment of a man's wealth is made 
up of varying proportions of such separate utilities. Every 
one purchases first necessaries, then comforts, then luxuries. 
But what is luxury to one man may be almost necessity to 
another. What is bought with one's last dollar is the marginal 
increment of enjoyment ; but the more dollars we have, the less 
the utility of each. To a man with a very small income the 
final dollar may afford the luxury of a few pints of beer ; to 
the rich man the dollar spent in beer is not marginal. His 
marginal increment of wealth may take the form of luxuries 
like champagne or pictures, but they will generally consist of 
particular attributes of commodities. It may be the fashion- 
able cut of his garments, the last touch given to the delicious 
dinner by a cordon bleu, the sumptuousness of his books, 
the elegance of his carriage, the artistic quality of his china 
or silverware. The garments, the dinner, the books, the car- 
riage, the china, — each possesses various kinds of utility ; but 
what makes the particular objects desirable to him is not the 
primary, elementary utility in each, but the final marginal 
utility. 

Fourthly, since each of the separate utilities of an article 
becomes at a certain point marginal to different classes of 
men, its value depends not upon its marginal utility as a whole, 
but upon that of the increments of utility each estimated 
separately. If value were the measure of marginal utility as a 
whole, all but the simplest commodities would be worth far 
more than they are. Take, for instance, a fine automobile. 
There are at least five different qualities which give it a value. 
These are, in the order of importance, (i) power to afford 
locomotion ; an old two-wheeled ca*t would do as well : 
(2) freedom from jolting and protection from sun and rain; 



i? 77] Increments of Wealth. 187 

a top-buggy would do this : (3) size ; a plain coach would 
possess this : (4) elegance of finish ; a fine equipage would have 
this : (5) speed and exhilaration ; only a motorcar will give that. 
In such a vehicle there would be, so to speak, at the same time a 
cart, a buggy, a coach, an equipage, a self-propeller. The most 
important or primary utility is the power to afford locomotion. 
Without this it would be of no use at all. The next quality in 
importance is comfort ; if it has no springs, the vehicle will not 
be used for pleasure driving. And so on with the other quali- 
ties ; each has a diminishing importance. Yet the value of 
the vehicle is not the reflex of its marginal utility as a whole. 
For the primary quality of locomotion alone the rich man 
would, if necessary, pay an immense sum. The mere fact of 
riding, which might be a luxury to a poor man, may be a 
necessity to him. The second utility — comfort — would be 
less important than the first, but might still be prized im- 
measurably by him. And so on with the other qualities. So 
that, if need be, he would pay a fabulous amount for the 
vehicle. 

As a matter of fact, however, what he values in the partic- 
ular automobile is the fifth or final utility, that of self-pro- 
pulsion. He probably has buggies, coaches and equipages 
galore. The fourth, third and preceding utilities represent 
less value because each utility is marginal in turn to a class 
of smaller spending power. If automobiles rose in price, there 
would be fewer of them, but more equipages, because the 
particular quality which differentiates an equipage from an 
ordinary coach would be a marginal utility within the reach of 
a larger but less wealthy class. If equipages advanced in 
price, more plain coaches would be built ; if the price of 
coaches rose, more buggies would be built. In each case the 
vehicle is desired by a particular class for a new utility, which 
is to that class marginal. Each successive class, however, is 
poorer than its predecessor, and the gradations themselves 
become less. There is more divergence between a multi- 
millionaire and a man of moderate wealth than between the 



1 88 Meaning of Value. [§ 77 

latter and a man of simply comfortable means. Thus there 
will be a greater difference in price between automobiles and 
equipages than between these and coaches, more between a 
coach and a buggy than between a buggy and a cart. In each 
case the special utility for which the vehicle is bought is a 
marginal utility to a poorer class. When a rich man buys an 
automobile, he does not pay the immense sum which he would, 
if necessary, give for the mere privilege of locomotion. He 
pays the small price which a poor man would pay for a cart, 
plus the somewhat larger addition that a slightly less poor 
man would pay for the difference between a cart and a buggy 
(comfort), plus the still greater increment that a man of 
moderate means would pay for the difference between a buggy 
and a coach (size), plus the yet larger increment that a fairly 
wealthy man would pay for the difference between a coach 
and an equipage (elegance), plus the final and largest incre- 
ment that he and his class are willing to give for the marginal 
utility to them of the automatic attachment. All these 
increments added together are far less than what he would, 
if necessary, pay for the privilege of locomotion, — the cart 
element in the automobile. 

When, therefore, we say that value or purchasing power is 
the expression of social marginal utility, it is clear that what 
we mean is that value is the expression of the social marginal 
increments of utility which are bundled together or united in 
anything, and each of which is marginal to a different class. 



CHAPTER XIII. 
THE MEASURE OF VALUE. 

78. References. 

W. Smart, Introduction to the Theory of Value (1891), chs. ix-xiv; J. B. 
Clark, Philosophy of Wealth (1886), ch. xxiv ; A. Marshall, Principles 
(1898), bk. V, ch. xiv ; N. G. Pierson, Principles (1902), part i, ch. i, 
§4; W. S. Jevons, Theory (18S8), ch. iv ; E. v. Bohm-Bawerk, Positive 
Theory of Capital (1891), bk. iii, ch. x; F. v. Wieser, Natural Value 
(1903), bk. V ; A. W. Flux, Economic Principles (1904), ch. iv ; C. M. 
Walsh, Measuremettt of Exchange Value (1901), ch. i ; J. A. Hobson, 
Economics of Distribution (1900), ch. ii ; S. N. Patten, Dynamic Economics 
(1892), chs. ix, x; D. I. Green, Pai)i Cost and Oppoi-tunity Cost (Quart. 
Jour. Econ., VHI, 1895); A. C. Whitaker, History and Criticism of the 
Labor Theory of Value in English Political Economy (Columbia Studies, 
XIX, 1904); J. B. Clark, Essentials of Economic Theory (1907), chs. iii 
and vi. 

79. Meaning of Cost. 

Value, as we have seen, has a meaning only when attached 
to a definite quantity of an article. The value of iron means 
nothing ; the value of a ton of iron means something. In 
order to ascertain why anything has value, we must therefore 
inquire not only why we attach any importance to it as com- 
pared with other things in general, but also why a definite 
quantity of that article satisfies more or less of our wants than 
an equal quantity of something else. We must regard not 
only our desire in the abstract, but our desire for a particu- 
lar amount. That is, in analyzing value we must take into 
consideration not only the demand, but the supply ; for the 
effective demand for an article which lies at the root of 
value is itself influenced by the supply. Of two equally useful 
articles we shall be more concerned in securing the one the 

189 



190 Measure of Value. [§ 79 

supply of which is limited than the one the supply of which is 
abundant. 

What regulates supply? In the last resort it is the forces of 
nature as utilized by the energy of man. In some cases nature 
gives so abundantly that man need do nothing ; in other 
cases nature is so niggardly that his utmost effort fails to 
augment the scanty stock. Between these two extremes lie 
the great mass of commodities the supply of which can be 
increased through human action. The more readily nature 
discloses her secrets to man, the less is the difficulty of secur- 
ing a supply. The greater the stubbornness of nature, the more 
determined do our efforts become. It is in this sense that 
value may be considered to be the measure of the difficulty of 
attainment, — that is, of the cost involved in securing a supply. 
Value, then, would be the expression of costliness. 

What, more precisely, is cost? The word is used in a 
variety of senses. To the consumer cost means price ; if a thing 
costs a dollar, he means that the price is a dollar. To the 
employer cost means total cash outlay expended in production. 
Here the cost usually is less than the price, the difference 
between cost and price being the profit : a machine may cost 
the builder ten dollars ; he may sell it for twelve. To the 
workman cost means irksomeness of labor ; the harder the 
work, the more does his labor " cost " him. Underlying all 
these meanings is the idea of sacrifice, the giving up of some- 
thing in return for the object to be attained. All sacrifice 
involves a pain, — a pain of doing something distasteful or 
of refraining from doing something pleasurable. The one is 
present physical sacrifice, the other present mental sacrifice 
depending upon a future physical sacrifice. 

Just as the word utihty brings to our mind the pleasure 
we get from a thing, so the term disutility is used to signify 
its ability to inflict pain. We know that the marginal utility 
of a commodity diminishes with the increase of the amount 
at our disposal, and under certain conditions shrinks to zero. 
We have so much of it that it becomes indifferent to us. It 



§ 79] Meaning of Cost. 191 

possesses what Jevons calls " inutility," that is, no (marginal) 
utility. Its value, as in the ordinary case of air and water, is 
nothing. Under other conditions of supply a commodity which 
usually possesses utility may actually inflict a pain.^ Wood ordi- 
narily satisfies a want ; but when the prospective farmer tries to 
make a clearing, the wood is something to be got rid of. Its 
presence is a discomfort. It possesses not a positive, but a 
negative, utility. It has gone through the stages of utility and 
inutility, and has reached that of disutility. Instead of being 
a commodity it might now be called a " discommodity." So, 
in the same way, water in parts of England is something to 
be removed by draining the fens ; water in arid America is 
so necessary for irrigation purposes that it attains a high 
value. 

Not only things external to a man run through this scale 
from utility to disutility. Physical activity itself is subject to 
the same law. When a man begins to work, the exercise of 
his muscles is a pleasure. A certain amount of it is even a 
necessity. With the increase in the amount beyond a certain 
point, the pleasure diminishes, until further activity becomes a 
matter of indifference. A still further increase means dis- 
comfort, until, finally, any more work involves positive agony. 
Labor or toil, therefore, means painful exertion. But just as 
the same commodity may, according to circumstances, possess 
utility or disutility, so the same activity may or may not in- 
volve toil. Singing is generally a pleasure ; to the chorus girl 
it is toil. Golf playing is a diversion ; to the golf teacher it is 
labor. 

Cost, therefore, is at bottom equivalent to pain. We un- 
dergo pain in order to secure utility or to remove disutility. 
Cost is always the antithesis of remuneration. We give up 
something in order to get something in return. The ordinary 
man tries to secure the greatest result with the least effort. 
He will toil only up to that point where the cost, or pain, 

^ Some commodities which seem to give us pain really afford a surplus 
of pleasure. A distasteful medicine is none the less prized by us. 



192 Measure of Value. [§ 80 

begins to exceed the pleasure of what he gets in return. 
There are grades in disutihty or pain, just as there are grades 
in utiUty or pleasure. As the marginal utility of a commodity 
depends on the supply, so the marginal disutility or pain of 
labor depends on the amount. The more fish I have, the less 
the utility of each ; the more hours I must work to catch them, 
the greater the disutility of each hour's work. Up to a certain 
point the pain of the work does not equal or exceed the 
pleasure I get from the fish. Beyond that point I shall not 
work, because the result will be a surplus of pain. At that 
marginal point the utility of the fish equals the pain or cost of 
the labor. There will be a balance between the pleasure and 
the pain ; or, in other words, the pleasure and the pain will be 
in equilibrium. In the case of the individual economy — that 
is, of man living apart from society — the marginal degrees of 
utility and of pain, or cost, therefore tend to be equal. 
Marginal cost equals marginal utility. The value of the fish 
may be estimated in either the one or the other. 

80. Individual and Social Cost. 

In dealing with the problems of actual life, however, we 
treat not of a Crusoe living on fish, but of men living in soci- 
ety and making exchanges with each other. The individual 
economy is profoundly modified by the social economy. This 
is the point that has often been overlooked. Our study is 
social economics. 

We have seen that the marginal utility to an individual is, 
in effect, a reflex of the social marginal utility. In the same 
way the marginal " disutility " to an individual may be con- 
verted through social causes into a utility. What gives one 
man pleasure may give another pain. I may enjoy a horse ; but 
if you do not ride or drive, the horse will put you to the use- 
less expense of keeping him. Yet, since there is a social de- 
mand for horses, you can get rid of him to advantage ; and 
you will therefore not give him away, but keep him until you 
can sell him with profit. Although the horse had a positive 



§ So] Individual and Social Cost. 193 

disutility for you, he now acquires an indirect utility because 
of social reasons. So if the farmer, mentioned above, who 
wanted to make a clearing, lived by chance near a large com- 
munity, he would not burn the wood, but sell it, because it 
would now have a social utility. Its disutility to him would be 
converted into a utility. It is only when anything produces 
a surplus of pain to the community as a whole — as a plague 
of grasshoppers, or an inundation, or the sewage of a city 
of which there is no intelligent disposition — that it possesses 
social disutility. In such a case it can have no indirect utility 
for the individual. 

Not only may cost thus change into utility, but the real cost 
of importance in affecting value is social cost, not individual 
cost. We stated above that value is the measure of sacrifice. 
In what sense, however, is value the measure of sacrifice? 
Evidently, not of individual sacrifice. A street-sweeper may 
work harder than a skilled factory hand, and yet the value of 
his services will be less. Value is a social conception ; society 
puts its appraisal upon commodities. If value is a measure of 
sacrifice and if value is a social estimate, value must be the 
measure of social sacrifice or cost. Social sacrifice means the 
sacrifice which members of society as a whole are willing to 
make. The exertion of one man is estimated in relation to 
the exertion of another, and the sacrifice of each is compared 
with the needs of society as a whole. The standard is social, 
not individual. It is far easier to be a street-sweeper than a 
skilled factory hand. Society is more willing to spare the 
former than the latter ; for, to replace the one, society must 
give up more of its energy than to replace the other. Con- 
sequently, although the street-sweeper may work the harder, 
the sacrifice or cost to society is less than in the case of the 
factory hand. The latter saves society more effort. When 
one commodity is exchanged for another, or when both cost 
the same, it means that the additional sacrifice that would be 
imposed upon society to replace either of them is the same. 
The marginal social cost is identical. 

13 



1 94 Measure of Value. [§ 8i 

81. Cost and Surplus. 

Since economic activity consists in securing as much enjoy- 
ment as possible with the least effort or cost, it follows that 
under conditions of progress the individual will endeavor to 
secure a surplus utility. If game is plentiful in one section 
and so scarce in another that the hunter must work to the 
point of exhaustion, his needs will be satisfied by far less ex- 
ertion in the first case than in the second. The extra utility 
which he enjoys is called residual utility, or surplus utility, or, in 
short, surplus. Looked at from the point of view of produc- 
tion, it is a producer's surplus : the labor of hunting is the 
cost of securing or producing the game. From the point of 
view of consumption, it is a consumer's surplus : the pleasure 
of eating the game is its utility. The excess of the utility 
over the cost is the surplus. Whether we call it consumer's 
surplus or producer's surplus is immaterial. 

The conception of surplus, however, is sometimes used in a 
second way. In the case of the surplus just referred to we 
compare enjoyment with exertions, and we call it either pro- 
ducer's, or consumer's surplus according as we look at it from 
the point of view of cost or of enjoyment. This conception 
of surplus is universal : it applies to every man who is at once 
a producer and a consumer, to the man living in society as 
well as to the solitary huntsman. The term " surplus " may, 
however, be used in another sense, which leaves out of account 
the idea of exertion, and which regards every man only as a 
consumer. It assumes that there has been no cost of acquir- 
ing the articles, or that the subjective cost or toil of acquisition 
is precisely the same to all. Here the surplus satisfaction that 
an individual secures is entirely a consumer's surplus,^ depend- 
ing on the relative urgency of his different wants. If I agree 
to give up a book for my neighbor's knife, I do so because 
I expect his knife to afford me more satisfaction than my 

1 The term " consumer's rent," first suggested by Marshall, is not so 
good because of the equivocal meaning of " rent." 



§ 8i] Cost and Surplus. 195 

book. The utility to me of the knife is greater than the pain 
of parting with the book. As a consumer, I consider the 
pain of parting with the book as the exact equivalent of 
the utility I lose ; but since the utility to be afforded to me 
by the knife is greater than the utility I lose through the book, 
there will be a balance to my credit. As a consumer, I expect 
a surplus enjoyment. 

This specific consumer's surplus, however, is of no prac- 
tical significance. For in actual life we cannot enjoy anything 
without procuring it, — that is, without its costing us something. 
But just as enjoyments or utilities differ from individual to 
individual, so do costs or sacrifices differ. Both the knives 
and the books can be obtained only on the condition of some 
exertion. The cost, or pain, of parting with the book depends 
on the cost, or pain, of acquiring the knife. Hence the only 
real surplus which is of importance is the surplus of enjoyment 
over cost, whether we call it producer's surplus or consumer's 
surplus. If we take the possession of knives or books for 
granted, we can indeed speak of consumer's surplus ; but if 
we reflect that knives and books must be procured before they 
can be parted with, the surplus becomes a real surplus, which 
can equally well be called a producer's surplus. It is a sur- 
plus of utility over cost. 

Individual surplus, however, is essentially subjective, and 
never affects prices. For value is a social conception. This 
statement is true of surplus in general, as well as of the abstract 
consumer's surplus just referred to. I secure a surplus utility 
from my comrade's knife, but he secures a surplus utility from 
my book. He would otherwise not have given up the knife. 
The exchange is therefore mutually beneficial. The old belief 
that what one man (or one country) gains in an exchange 
another necessarily loses, is incorrect. Each may get a surplus 
utility. But while there is a surplus utility to each, the value 
does not necessarily change. The value of the book and the 
value of the knife remain the same. The marginal utility of one 
book would still be equal to that of one knife. If for some reason 



y 



196 Measure of Value. [§ 81 

the book-owners found that knives were twice as useful to them 
as before, and if for a similar reason the knife-owners thought 
that books were twice as useful to them as before, the surplus 
utility of the exchange to each owner would be double what it 
was before ; but the book would still exchange for the knife : 
their value would be unaltered. Value may thus remain the 
same, even when the benefits of exchange to both parties 
grow. The more varied the wants of a community, the greater 
the benefits of exchange. 

On the other hand, values may change and the surplus 
utility remain the same. If the book-owners prized knives 
twice as much as before, while the importance of books to 
knife-owners was unaltered, this very fact would increase the 
aggregate social demand for knives, and therefore the sacrifice 
that the book-owners must make to get a knife. The knife- 
owners would make the book-owners give two books for a 
knife. The price of books would fall, and that of knives rise. 
The marginal utility of one knife would equal the marginal 
utility of two books. The surplus utility to the book-owners 
would remain the same, because, although the utility would 
increase, the cost would increase in the same proportion. In 
every exchange the cost, or sacrifice, depends on the reciprocal 
demand for the commodities. 

The surplus utility that any one individual gets from an eco- 
nomic action, therefore, has no influence on value, however 
much it may affect his own happiness. It is a result, not a 
cause. Surplus is the excess of total utility over total cost. 
Value is an expression of marginal utility or marginal cost. 
Surplus in the case of any one person is the result of an indi- 
vidual subjective estimate which differs from man to man ; 
value is the result of a social estimate in which the individual 
preferences lose their significance. 

We must therefore be careful to interpret correctly the 
statement above, that marginal utility equals marginal disutil- 
ity, or cost. In an isolated economy, where there is only 
one person battling with nature, this tends to be true of the 



§ Si] Cost and Surplus. 197 

individual. In society, on the other hand, whatever the rate of 
exchange, it is only the social utility and social cost of which 
the marginal degrees are equal. If a knife exchanges for a 
book, it is because the demand in the community as a whole 
is such that the marginal sacrifice to a social group in parting 
with a book tends to equal its marginal pleasure in getting 
a knife. To put it more accurately, a knife will exchange for 
a book only because the sacrifice to society in making the 
knife, for which it receives in turn the pleasure of books, tends 
to equal the sacrifice of making the book, for which it receives 
in return the pleasure of knives. To any individual the sacri- 
fice may be less than the pleasure, but there will always be a 
marginal individual to whom pleasure and sacrifice are equal. 
The marginal pleasure in the aggregate tends to equal the 
marginal pain in the aggregate. The balance or equilibrium 
is between the pains and the pleasures of the sum of individuals. 
Where an exchange economy exists, the real equilibrium is a 
social equilibrium. 

This shows clearly that the real cost to any member of 
society which influences value is not the subjective cost to him. 
The sacrifice imposed upon society to secure anything is, as 
we have seen, the exertion needed to replace it. To replace 
an article, however, from the social point of view, is to produce 
it. For, although an individual may replace an article by pur- 
chasing it from the producer, society as a whole can replace 
an article only by producing it. Thus, when we speak of 
social cost, we really mean cost of production ; and when we 
say that value is influenced by cost, we mean that value is influ- 
enced by cost of production. What may be to the individual 
a subjective cost becomes, when translated into terms of 
society — that is, of value — an objective cost to him. We 
think no longer of the sacrifice imposed upon any one indi- 
vidual, but only of the social sacrifice, or cost, embodied 
in the commodity ; or, rather, the sacrifice, or cost, to the 
individual is the result and reflex of the sacrifice to the com- 
munity. Just as we saw above that the individual utility which 



198 Measure of Value. [§ 82 

affects value is the reflex of. the social utility, so the individual 
cost which affects value is, as we shall see more fully in a 
moment, the reflex of the social cost. If an individual desires 
to sell a commodity, he will normally get for it not what he 
chooses, but what society as a whole fixes as the proper figure. 
He may personally be able to raise a particular horse for less 
than a particular cow ; but that will not enable him to sell a 
cow for more than the usual price of a horse. His own indi- 
vidual estimate is of importance only as affecting the aggre- 
gate social estimate. Every individual gauges his economic 
well-being from the point of view of surplus, — - of getting as 
much satisfaction as possible above the cost ; but the cost, or 
sacrifice, which he must incur is fixed not by himself, but by 
society as a whole. A farmer will not permanently raise cows 
if his cost exceeds the social level as reflected in the price. 

82. Cost and Utility. 

The failure to realize that value is a social conception has 
led to much pointless controversy. Thus Ricardo and his 
followers maintain that the value of a commodity is fixed by 
its cost of production ; while Jevons and those that agree with 
him contend that value is fixed by its marginal utility. Both 
are right, but neither is right in the sense in which he under- 
stood the terms. Cost of production is the measure of value ; 
but it is not, as Ricardo thought, individual cost. Marginal 
utility determines value ; but it is not, as Jevons thought, indi- 
vidual utility. Both cost and utility measure value, because, 
as we have seen, marginal social cost is always equal to mar- 
ginal social utility. In the way they frame the statement, the 
followers of both Ricardo and Jevons are correct in denying 
the others' statement, and yet err in their own. Rightly inter- 
preted, they are correct in their own statement, and yet err 
in denying the truth of the others'. Let us make this clear. 

Utility, as we know, is the fundamental quality of everything 
used by man. But utility is not sufficient to give value. For 
anything to have value its supply must be limited. The utility 



§ 82] Cost and Utility. 199 

which gives it value is the marginal utility. If the supply is 
unlimited, the marginal utility is zero. Positive marginal utility, 
therefore, depends upon limitation of supply. But if the sup- 
ply is limited, it will cost some sacrifice to secure or to repro- 
duce it. Therefore, when we measure the marginal utility of a 
commodity, we measure the cost of securing it. Hence either 
utility or cost may be declared the measure of value. Thus, 
while marginal utility is the fundamental cause of value in the 
sense that nothing could have any value if it had no utility, 
cost may be declared to be not indeed the cause, but an 
equally good measure, of value. Regarded from this point of 
view, the discussion as to which is the real measure of value is 
as futile as to ask how to measure the sound or quality of a 
hammer's blow on a bell. Without that particular kind of bell 
there would be a different quality of sound ; without that par- 
ticular kind of hammer there would likewise be a different 
quality of sound. So in economic life we deal with the de- 
mand for anything as compared with its supply. When we 
speak of utility, we think of the person who wants it, — that is, 
of the demand. When we speak of cost, we think of the per- 
son who parts with it, — that is, of the supply. But these 
interact mutually; for the demand, although reflecting the 
utility, would change if the cost were different ; and the supply, 
although conditioned by the cost, would change if the utility 
were altered. To affirm that either utility or cost exclusively 
measures value is as incomplete as to say that either demand 
or supply exclusively fixes value. Value is the expression of 
the relation between demand and supply. We cannot speak 
of marginal utility without implying cost ; we cannot speak of 
marginal cost without implying utility. 

All this is true, however, as we have seen, only of social 
cost and of social utility. The utility of anything to an indi- 
vidual figures in the determination of value only to the extent 
(in most cases infinitesimal) that the individual choice goes 
to determine or change the choice of the community. If I 
have a potato field at home, that will not obviate the necessity 



200 Measure of Value. [§ 82 

of my paying the market price for potatoes. If I am directed 
by my physician to live on potatoes exclusively, that will not 
lead the dealer to charge more than the market price. The 
demand that tells is the aggregate social demand, depending 
on the social utility. 

Conversely, the cost that influences value is not the cost of 
j)roduction of that particular commodity to the individual pro- 
c^ucer. It may take me two days to make with old tools a 
table which fully equipped carpenters can turn out in a few 
hours. I can get for my table no more than the carpenters 
for theirs. The carpenters can get this price for their table, 
not because it has cost them so much work, but because they 
save the members of society as a whole the sacrifice, or cost, 
of making the table for themselves. If there were no carpen- 
ter, society would have to set to work, abandon some of the 
things it does now, and give up some of its time to make 
tables. Instead of each member of society devoting a part of 
his cfay to making a part of a table, society as a whole sets 
aside a certain class to make nothing but tables. But what 
societv is willing to pay for the table is always the marginal 
cost tu it, and this marginal cost is the final sacrifice which 
society is willing to incur for tables as compared with other 
things. What the carpenter can get for the table will adjust 
itself to this amoitnt of social sacrifice, and thus the value of a 
commodity gets to be the equivalent of the (individual) cost 
of producing it. We may thus roughly say that individual 
labor or cost of production fixes value ; but what it really does 
is not to fix value, but to express the value that is fixed by 
social forces as a '<*ftole. The value is due not to the labor of 
the individual who has made it, but to the social service which 
it is going to render, — that is, to the social sacrifice which it 
is going to save. If it does not render that service, it will not 
possess that value, no matter how much individual labor has 
been spent on it. On the other hand, if less individual labor 
be spent on it, it will have less value, not because less indi- 
vidual labor has been spent, but because the marginal sacrifice 



§ 8^^ Surplus and Progress. 201 

of society is now less. Utility, and not cost, is the ultimate 
cause of value. 

We see, then, that value may be defined either as the ex- 
pression of marginal social utility or as the expression of the 
marginal social sacrifice incurred to secure utility. Value may 
be estimated in terms of either social utility or social cost, be- 
cause the marginal degree of the one is equal to that of the 
other. Individual cost, however, affects value only in the sense 
that it adjusts itself to the social utility, which is the supreme 
test. Utility is the positive factor, cost is a result. The exact 
relation of individual cost of production to value, however, 
still remains to be studied, and will be discussed later. 

83. Social Surplus and Progress. 

Since all progress consists in getting more results with less 
efforts, the problem of social cost and social surplus becomes 
one of basic importance. All surplus or residual utility is the 
balance of satisfaction over sacrifice. It may therefore be 
augmented in two ways : the sacrifice may remain the same, 
while the satisfaction increases ; or the satisfaction may remain 
the same, while the sacrifice decreases. In the one case we 
deal with problems of consumption, in the other with problems 
of production. In the one case we approach the subject from 
the point of view of utility, in the other from that of cost. 

The social surplus may be enlarged by changes in consump- 
tion. The sacrifice incurred by the individuals that compose 
society may remain the same, and yet they may use so much in- 
telligence in the rearrangement of their choices of satisfaction 
that they may procure a greater net result. It need not cost 
more effort to cook a good dinner than an unpalatable one, 
and yet the surplus of satisfaction over sacrifice is greater. 
When the social choices are improved on a large scale, there 
will be a great increase in the social surplus. 

While it is possible to have in this way a larger satisfaction 
with the same effort, it happens just as frequently, however, 
that we can procure the same satisfaction with a smaller effort. 



202 Measure of Value. [§ 8^ 

The emphasis is here laid not upon consumption, but upon 
production. Whatever diminishes the cost of production en- 
larges to that extent the surplus of society. If the dinner 
which originally cost one dollar can now be supplied for fifty 
cents, we shall have to work less to get that dinner ; or if we 
work as hard, we shall have the remaining half-dollar to spend 
on something new. All civilization depends on the increase of 
our wants. In most cases, however, the appearance of a new 
want requires additional effort on the part of individuals for 
its satisfaction. If the additional sacrifice keeps pace with the 
additional want, we are no better off than before, — there is 
no increase of the social surplus. But as soon as we can satisfy 
the old want with a smaller total effort, the surplus is increased 
because some of the efforts previously devoted to the satisfac- 
tion of the old want are now set free for the attainment of the 
new object. With the same output of energy we secure greater 
V results. Diminution of social cost is the great creator of social 
surplus. 

While changes in consumption are of significance in them- 
selves, they become of great importance chiefly as engendering 
changes in production. Whether we call the social surplus, 
however, a consumer's surplus or a producer's surplus, is, as 
we know, immaterial. It is equally immaterial whether we say 
that the progress is due to lower cost or to greater utility. So- 
cial surplus is the result of man's struggle with nature. It is 
the margin between result and effort. The way to increase the 
surplus is to maximize the results and to minimize the efforts, — 
that is, to increase utilities and to decrease costs. 

The mere increase of the social surplus is, however, not all 
that is necessary to progress. Without such a surplus, indeed, 
there can be no highly developed civilization ; for where the 
energy of society is entirely occupied with procuring the bare 
means of subsistence, there can be no opportunity for the 
higher life. A frontier community differs from a developed 
one chiefly in the fact that in the former there is little social 
surplus available. But the mere production of wealth and 



§ 8^'] Surplus and Progress. 203 

prosperity does not suffice. Unless attention be paid to the 
problem of distribution as well, the social surplus may remain 
in the hands of a favored few — the " remnant " of whom 
Matthew Arnold sings — while the mass of the community 
may be largely shut out from participation in its benefits. 
The real democracy of industry, like the true democracy of 
politics, does not mean that every man is the equal of every 
one else, but that all should have an equal opportunity to de- 
velop what is in them for good. The problem of social progress 
is to reconcile the greatest possible social production with the 
best possible social distribution ; to create a continually grow- 
ing social surplus and to provide for its equable division. 
Without the latter we are apt to have plutocracy ; without the 
former we can scarcely rise above savagery. 



CHAPTER XIV. 
THE CAPITALIZATION OF VALUE. 

84. References. 

J. B. Clark, Distrihition of Wealth (1899), ch. ix ; F. A. Fetter, Prin- 
ciples (1904), part I, div. C; T. Veblen, Theory of Btisiness Enter- 
firise (1904), chs. v-vi ; M. Pantaleoni, Pure Economics (1898), part 3, 
ch. iii, § 5 ; E. v. Bohm-Bawerk, Positive Theory of Capital (1891), bk. 
V, chs. i, ii ; F. v. Wieser, Natural Value (1893), ^k. iv, ch. vii ; H. 
Sidgwick, Principles (1883), II, ch. vi ; J. A. Hobson, Economics of Dis- 
tribution (1900), ch. iv ; Irving Fisher, Capital attd Income {igo6) ; C. A. 
Tiittie, Peal Capital Concept (Quart. Jour. Econ., XVIII, 1903) ; W. Z. 
Ripley, Capitalization of Public Service Corporations {Ibid., XV, 1901) ; 
E. S. Meade, Trust Finance (1903), ch. xvi ; R. M. Hurd, Principles of 
City Land Values (1903), ch. ix. 

85. Value and Rent. 

We have learned that the value of anything is derived ulti- 
mately from the satisfactions or uses which it affords, and that 
the price is the money equivalent of its uses. Some things 
afford only a single use ; the use of an ordinary article of food 
consists in its consumption. Other things are somewhat more 
durable ; a suit of clothes can be used for a season or two be- 
fore it is worn out ; a machine will last for years ; a house for 
decades. Finally, some things permit of perpetual use. A 
city lot will serve as a building site as long as the city exists ; 
the privilege granted to a street railway to occupy the public 
highways remains the same from decade to decade, although 
the recipient of the privilege may change. 

Things can be sold either by parting with their uses one by 
one or by disposing of all their uses for a lump sum. When I 
ask, what is the price of a carriage ? the owner will answer, ten 

204 



§ 85] Value and Rent. 205 

dollars a day ii he means the price of the use for that period, 01 
a thousand dollars if he refers to its use as long as it lasts. 
When we part with the use of a thing for a limited period, the 
payment is called a rent. We may rent a horse for an hour, or a 
dress-suit for an evening, or a typewriter for a month, or a house 
for a term of years. Strictly speaking, the word rent regards 
the transaction from the standpoint of the one who lends the 
use and secures a periodic return {redditus) ; while the word 
hire designates the transaction from the point of view of the 
one who enjoys the temporary use. Commonly, however, 
this distinction is disregarded, and we speak indiscriminately 
of a man hiring or renting a yacht or a house for his own use. 
The fundamental conception is the income, in the sense of 
pleasure or benefit income, to the user. Through the opera- 
tion of the social forces which bring about exchanges based on 
money, the income value of anything becomes its money rent, 
— the amount of money received by the owner or paid by the 
hirer. The income of anything is the rent paid or received 
for its use. 

Sometimes the word rent is limited to particular kinds of 
rents. In England, for example, where land formed the chief 
form of investment even as late as the eighteenth century, 
rents came to be synonymous with land rents, and when a man 
spoke of his rent roll, he meant the rentals which he received 
from his estate. As a consequence, the theory of rent elabo- 
rated by the English economists came to have a peculiar 
meaning. On the other hand, France, in the century before 
the revolution, had made greater progress in general financial 
enterprises, and rentes came to mean the income of the fund- 
holder. A rentier to-day still denotes one who is living on the 
income of his capital. As a general economic conception, 
then, rent is the periodic return (nowadays calculated in 
money) from the use of a thing for a definite period, whether 
that thing consists of land, or public funds, or anything else. 
Rent has a threefold aspect. ( i ) From the point of view of 
the economic good, rent is the product : the use that a thing 



2o6 Capitalization of Value. [§ 86 

affords is its product or rent. (2) From the point of view 
of the owner, rent is the income from the use or product. 
(3) From the point of view of the hirer, rent is the cost or 
payment for the use. People pay rents because they receive 
in return an income in the shape of the use afforded by the 
thing for which they pay. Rent therefore is at once product, 
income and cost. 

When we part with anything permanently, instead of with 
some of its uses for a time, we often speak of its selling or 
market or cash value, as opposed to its rental value. Strictly 
speaking, this contrast is inaccurate. When we rent anything, 
we are also dealing with selling value ; but what we sell is a 
single use, or several uses, rather than all its uses. Sometimes 
again we speak of property value as opposed to rental value. 
The advantage of this nomenclature is that as long as we con- 
trol the property we control all possible present and future 
uses ; the disadvantage is that property is a legal conception, 
while rent is an economic conception. A man also has prop- 
erty in his rents. The real contrast, as was pointed out above 
(§ 6), is between rental value, in its strict meaning of income 
value, and capital value. When a man sells one or more uses 
of a thing, he estimates its capital value. Roughly speaking, 
he rents in one case and sells in another; strictly speaking, 
he sells in both cases, but the price represents a limited use 
in one case and an unlimited use in the other. 

The question now arises, what is the relation of rental value 

to capital value, and how do we come to estimate capital 

values ? 

86. The Law of Depreciation. 

The durability of economic goods is essentially relative. At 
the one end, as we have seen, are the merely ephemeral acts 
or the things which are consumed by a single use, like a paper 
napkin or an apple. At the other end is a building site, which 
can support a structure to the end of time. Between these 
extremes lie the great mass of commodities. They all wear 
out sooner or later, and as they wear out they become incapable 



§ 86] Law of Depreciation. 207 

of affording as many or as effective uses. Sometimes the de- 
preciation is rapid, as with a flimsy silk dress ; sometimes the 
commodity lasts longer, as in the case of an ordinary machine ; 
sometimes it is very substantial, as in the case of a modern sky- 
scraper. In every instance, however, if it is intended to be 
used permanently, repairs are needed. Nothing is indestruc- 
tible except land, and even that is so, as we shall see later 
(§ 132), only in the peculiar sense that its extension remains. 
It is obvious that the capital value of anything depends in the 
first instance on the number of rental values, allowance being 
made for wear and tear. Where the good is ephemeral in the 
sense that it affords only a single use, the rental value and the 
capital value coalesce. The rental value is the capital value. 
We cannot buy the privilege of using the coal or ice even once, 
without buying the coal or ice itself. The wear and tear here 
equal the entire value, the single use is the consumption. 
When, however, we may expect a moderate succession of uses, 
there is a difference between the rental value and the capital 
value. Where the depreciation is rapid the difference is not 
great. A row-boat is quickly worn out, and even a single use 
may injure it severely. A boat which sells for sixty dollars 
will often rent for half that amount for a single summer, and 
the capital value is then only double the annual rental value. 
The boat may last for several years, but the older it grows, the 
greater the need of repairs and the smaller the net uses which 
it is capable of yielding, until finally the expense of repair 
exceeds the income, and the boat is thrown aside as worthless, 
possessing no capital value because it no longer has a single 
rental value. Where a larger number of uses can be enjoyed 
with comparatively little depreciation, as in a well-built house, 
the selling value is frequently ten or twenty times the annual 
rental value. It may be four or five years before any repairs 
are needed, but with each ensuing year the decay progresses 
and the cost of repairs augments, until here also the time ar- 
rives when there is no longer any surplus of income over outgo, 
of enjoyment over exertion. In practical life business men 



2o8 Capitalization of Value. [§ 86 

guard against the results of depreciation by instituting a sinking 
fund. Instead of spending all the earnings, they set aside an 
annual sum which will counterbalance the depreciation, so that 
at the end of a period the accumulated fund will sink or offset 
the outlay incurred to replace the commodity. The repairs, 
in other words, may be made from year to year, or may be 
allowed to accumulate, and made all at once at a subsequent 
period. Where no repairs are possible, as in a mine, the an- 
nual rent must still exceed that of ordinary land which osten- 
sibly yields the same annual returns, because the mine will 
ultimately be exhausted and a part of the rent must be put to 
the sinking fund or depreciation account, or goes to satisfy the 
expectation that the rental value will cease. 

The fundamental explanation, therefore, of the relation of 
capital value to rental value is durability, or the degree of 
succession of rental values. Capital value depends on net 
rent, not on gross rent ; that is, it depends on the succession 
of gross returns, less repairs. Capital value is reached by 
adding together the gross rentals and deducting the sinking 
fund. The ratio of capital to rental value depends in the first 
instance on the number of rental values. 

This does not mean that more permanent commodities have 
a greater capital value than less durable goods. Iron has less 
value than silk, although it is far more durable. The statement 
means that when the gross rental of two commodities is the 
same — that is, when the price paid for the use of each for a 
definite period is identical — the difference in their capital 
values is to be explained by the relative number of such uses 
which each can afford. The rent of a house, as well as that of 
a horse, may be twenty dollars a month, yet the house will sell 
for far more than the horse. Neither would have any capital 
value if it had no rental value. The rental value of both is the 
same, because the marginal utility of a month's use of each is 
identical ; that is, the individuals forming that economic group 
get on the whole as much satisfaction out of a horse as they 
do out of a house. The capital value of the horse, however, 



§ Sy] Law of Future Estimates. 209 

is less than that of the house, because he will be more quickly 
worn out, — that is, because he cannot furnish an equally long 
succession of uses. 

Capital is capitalized income. Capital value is a stock or 
fund of rental values ; the larger the number of such rental 
values which flow in from a commodity, the greater will be 
its capital value in proportion to its rental value. The rela- 
tion of capital to rental value depends in first instance upon 
durability. 

87. The Law of Future Estimates. 

The uncivilized individual lives only in the present. His 
wants are spasmodic, and as soon as he has gratified these 
pressing needs he has no thought for the morrow. With every 
advance in culture he displays more prudence and foresight. 
Even some of the more highly developed animals, like ants, 
bees and squirrels, have an eye to the future, and in the time 
of plenty lay in a stock for the days to come. The philoso- 
phers tell us that the real pleasures of life are those of antici- 
pation and retrospection. But this is true only of the most 
highly organized natures, and true only in part even of them. 
To the mass of individuals present needs and present satisfac- 
tions are the all-engrossing ones. 

The result of this psychological fact is that we lay more 
stress on present enjoyments than on future enjoyments. To 
the average man a bird in the hand is worth two in the 
bush, even though he thinks that he will secure the two. 
Our estimate of the future is more or less uncertain, because 
W9 can never be absolutely sure of anything but the actual. 
The future may have in store for us either some change in the 
intensity of our wants or in the capacity of the particular ser- 
vice to satisfy our wants. Present wants and satisfactions are 
definitely measurable, because the degree of the one and the 
quantity of the other are fixed. Future wants and satisfactions 
are less definitely measurable, because of the concurrent or 
opposite changes that may take place before the future ripens 

14 



2 10 Capitalization of Value. [§ 87 

into the present. Hence the underestimate of the future as 
compared to the present. That is what we mean when we 
speak of discounting the future ; we " count off " a part of the 
enjoyment to come. 

The law of lower future estimates is a part of a larger law, 
with one aspect of which we have already become familiar. 
All sense impressions may be reduced to those of space and 
of time. When we deal with space impressions and apply 
them to economic life, we are in presence of the law of dimin- 
ishing space utility ; every additional increment in the supply 
of an actual commodity existing in space has, as we know, 
(§ 73) a decreasing importance. When we deal with time im- 
pressions, we are in presence of the law of diminishing time 
utility ; every additional postponement in the enjoyment of a 
commodity causes it to have a decreasing importance for us. 
Nothing has utility unless it exists in space and time. In- 
crease the space relation, that is, augment the supply, and you 
decrease the marginal utility ; increase the time relation, that is, 
postpone the gratification, and you again decrease the mar- 
ginal utility. In one case we deal with a margin of space ; in 
the other with a margin of time. The effect is the same. 
Increase the supply to a certain point, and the marginal utility 
or value will disappear ; augment the postponement of the sat- 
isfaction to a certain point, and the marginal utility or value 
will likewise disappear. 

The present estimate of a future satisfaction is therefore 
ordinarily less than that of a present satisfaction ; the present 
value of a future enjoyment is less than that of an immediate 
enjoyment. The present estimate of future uses becomes 
fainter as the use recedes into the future, until the value of 
a very distant use vanishes. Therefore, while a commodity 
with a present rental value may hold out the prospect of 
many successive rental values, the present worth of each of 
those future rental values becomes progressively smaller. Since 
the capital value of anything is the present worth of all the 
successive future rental values, it is clear that the dispro- 



§ 88] Law of Diminishing Returns. 2 1 1 

portion between the rental and the capital value will not grow 
simply with the durability of the commodity; for the more 
durable the commodity, the fainter will be the present estimate 
of the distant use, until finally a further increase in durability 
will add nothing to the value. A building site may rent for a 
fixed sum, and may reasonably be expected to yield that rent 
for an indefinite period. Yet when it is sold it will bring as 
capital value a sum equivalent to only about twenty or twenty- 
five times the rental value. There is no depreciation of the 
land, there is no wear and tear, and no necessity for a sinking 
fund, and yet the land is worth, as it is called, only twenty 
years' purchase ; that is, it can be purchased for a sum twenty 
times the annual rent, even though in all human probability it 
will go on yielding an annual rent for an indefinite future. 

The relation between rental and capital value, therefore, is 
a resultant of two forces, — the law of depreciation and the 
law of future estimates. From one point of view, the more 
durable the commodity and the larger the number of successive 
uses, the greater will be the disproportion between rental and 
capital value ; from another point of view, the more durable 
the commodity and the more remote the succession of future 
uses, the less will the disproportion be. Both of these state- 
ments may be summed up in the assertion that the capital 
value of anything is the result of adding together the present 
worth of each of the successive rental values. If the com- 
modity lasts long enough to furnish two equal annual rental 
values, the capital value will be slightly less than twice the first 
rental value ; if we may expect three rental values, the capital 
value will be somewhat less than three times the first rental 
value. Each increment which goes to form the capital value 
decreases, until finally there is no further increment at all. 

88. The Law of Diminishing Returns. 

We have thus far dealt with consumers' goods — that is, 
articles of immediate consumption — and have seen that their 
value is derived from the uses or enjoyments which they afford. 



2 1 2 Capitalization of Value. [§ 88 

Some goods, however, do not afford a direct enjoyment, but 
are used as instruments to produce things that afford enjoy- 
ments. These are hence called indirect, or instrumental, or 
production goods. It is obvious, however, that just as the 
capital value of consumption goods is derived from their rental 
values or uses, so the value of production goods is derived 
from the value of their products, — the consumption goods. 
The value of the raw material is due to the value of the finished 
commodity. The value of pig iron depends upon the value of 
the nails, billets and other iron products into which it enters. 
The value of labor depends on the value of what the labor 
produces. Value starts with direct human satisfactions, and 
is reflected back and back until it attaches to the original 
agent, act or thing which is ultimately responsible for the 
immediate income or inflow of satisfaction. 

The fundamental law of value is the law of diminishing 
utility. The satisfaction derived from successive increments 
of a consumption good diminishes as the supply increases. 
When, in the same way, we compare the utility of different 
increments of production goods or productive agents with one 
another, we are in the presence of the law of diminishing 
returns. Instead of the diminishing utility of direct services 
afforded by something consumed, we think of the diminishing 
return or service afforded by something in producing the 
economic good which we consume. If a man tends one loom, 
he will turn out a certain quantity of cloth. Double the looms 
and he will do double, or perhaps more than double, the work ; 
give him four looms and the output will be fourfold. After a 
certain limit is reached, however, the care of each additional 
loom will dissipate his energy and cause more mistakes. The 
total output may be larger, but the output of each loom will 
be less, until finally new looms will not augment the output 
at all. If we enlarge the supply of labor instead of tools, the 
same holds good. More effort means, after a given point, 
relatively smaller results. A rower may increase his speed 
by putting forth more exertion, but after a certain point more> 



§88] Law of Diminishing Returns. 213 

efforts do not mean greater speed. An increase of rowers 
will not change the law. Two men will not row a boat twice 
as fast as one, four men will not row it twice as fast as two. 
A large omnibus will hold more people than a small one, but 
when a certain size has been reached, it will pay better to buy 
another omnibus than to enlarge the old one. On a piece of 
land it may be profitable to employ more men as well as to 
use more manure and better machinery ; but after a given 
point, additional "doses" of labor and capital will begin to 
give relatively smaller results. The law of diminishing return.-^ 
is universal. It is another aspect of the law of diminishing 
utility. The latter springs from the finite nature of man, the 
former from the finite nature in the elements of his environ- 
ment. The income or return from a production good or 
productive agent is like the income or utility of a consumption 
good. The test of each is its relative contribution to the 
satisfaction of wants. 

Just as the law of decreasing utility results in the conception 
of marginal utility — the foundation of all value — so the law 
of diminishing returns results in the conception of marginal 
utilization. This margin is the point beyond which an addi- 
tional effort will not give a sufficient return. The margin 
may be either intensive or extensive. If we crowd more 
people into the same omnibus, or run more trains over the 
same track, or make the laborer tend more looms, or put more 
manure into the same field, we have a more intensive utiliza- 
tion, until finally the intensive margin is reached where the 
additional returns will not compensate the additional effort 
or outlay. On the other hand, the crowding of the omnibus 
may drive passengers to another line, the multiplication of 
trains may cause accidents, the added looms may mean more 
breakage, the increase of manure may be unduly costly. In 
such cases the owner will find it profitable to purchase new 
vehicles, build a double track, hire more workmen, or secure 
additional plots of fresher land. This would be an extensive 
utilization, carried on until the extensive margin is reached. 



214 Capitalization of Value. [§ 89 

when it will not pay to add another vehicle, track, laborer or 
plot. The margin, whether intensive or extensive, is reached 
through the operation of the law of diminishing returns. Just 
as the value of every consumption good depends upon its 
marginal utility, so the value of every production good or 
productive agent (which is derived from the consumption 
goods which it produces) depends upon its marginal product, 
that is, its product at the margin of utilization. 

89. Forms of Value. 

If we analyze the things that are bought and sold in the 
market we find that they may be divided into four classes : 
first, human services, from those of the day laborer to those 
of the highest professions ; second, concrete goods, or com- 
modities, whether production goods or consumption goods; 
third, relations and privileges of all kinds ; fourth, a fund of 
capital. 

In the first class obviously only the single use can be 
sold. A service is a use, it is not a fund of stored up uses. 
Here, then, the selhng price of the economic good (the 
service) is the rental price. We speak of hiring a man, just 
as of hiring a piano. When we hire him for a definite task, 
we rent his service ; if we engage him by the day or month or 
year, we rent a limited succession of services. The only way 
in which all the services of the man can be sold at once is 
when he is a slave, and thus acquires a definite money value 
as a piece of property. In a state of freedom a man never 
parts with all his future services for a lump sum. The price 
paid for human services is not commonly called rent, although 
we do speak of an Italian padrone in America renting 
out his immigrant compatriots, or of the Southern prison 
officials renting out their convicts. Ordinarily the income 
derived from human services is called wages (or, in the case 
of the professional classes, salaries or fees) . Wages, then, are 
always income ; they are never capital, nor can they be 
capitalized except in the case of slavery. It is only then 



§ Sp] Forms of Value. 2 1 5 

that we can properly speak of human capital, or of capital 
invested in human beings. 

The next two categories, which, as we shall see later, differ 
in important ways, may be classed together in this respect, that 
they both possess a rental or income value as well as a capital 
value. A piece of land, a ship and a patent right may either 
be rented out from year to year or parted with entirely for a 
lump sum. Their product is always a rent, although the rent 
may be capitalized. 

Finally, as opposed to individual economic goods which 
have a capital value, there is the general fund of capital. Just 
as we speak of wealth in general as consisting of pieces of 
wealth, or of labor in general as composed of the individual 
laborers, so we speak of capital in general as the assemblage 
of individual pieces of capital. Capital as a general concep- 
tion stands in the same relation to the individual pieces of 
capital as a flock does to the sheep or a forest to the trees ; 
the sheep and trees are constantly disappearing and being 
replaced by new accessions ; the flock or forest persists, 
although the constituent elements are perpetually changing. 
Capital as a fund of wealth is the embodiment of value or 
purchasing power, and money is everywhere the measure 
of general purchasing power. Capital, therefore, as a fund 
of value can be estimated or transferred in the shape of the 
money which represents this value. We cannot buy the flock 
of sheep without buying the individual sheep, but through 
the interposition of money and credit we can acquire capital 
in the shape of general purchasing power, and then devote it 
to any use we desire. We can use it in production and build 
a factory, or we can use it for consumption and buy a yacht. 
We can put the fund of capital into concrete goods like 
machines or land, or into privileges like franchises or patents. 
When we buy capital in general, therefore, we buy the right of 
enjoying any future uses that we may elect ; we are not restricted 
to the particular uses afforded by the individual good in which 
our capital is temporarily embodied. The use of the sheep is 



2 1 6 Capitalization of Value. [§ 89 

limited ; the use of the capital invested in the sheep is poten- 
tially unlimited, because it can be changed at will to any other 
form. 

When we purchase the temporary use of an individual 
economic good, therefore, we pay a rent ; but when we pur- 
chase the temporary use of a fund of capital in general, the 
payment is called interest. Interest, hence, is nothing but 
commuted rent, just as capital is nothing but capitalized 
income. Instead of hiring a particular piece of capital and 
paying rent, we hire a fund of capital in general and pay 
interest. Interest, then, is not paid for money, but for the 
capital which the money represents. It is really not paid for 
the capital, but for the uses afforded by the capital when 
transmuted into the individual things which afford services. 
Interest of capital is based upon the rents of individual pieces 
of capital. The single thing yields a rent because it affords a 
return or product. If we add together all the net rents of 
existing goods or pieces of capital, we get the entire amount of 
interest. Total net rent at any given time is equal to total 
interest. Each consists of the whole of the product or income 
from all existing wealth which is or can be capitalized, — that 
is, of the aggregate of the return from all existing pieces of 
capital. The only difference is that interest is the calculation 
form of rent. Rent is figured in dollars and cents; interest 
as commuted rent is figured as a part of the whole or as a 
percentage of a principal. The rent of a house is so many 
dollars a year, the interest of the capital invested in the house 
is so much per cent a year. 

Wages, rent and interest, therefore, are analogous phenom- 
ena. They are all prices, even though prices in the language 
of the street are ordinarily restricted to the selling values of 
concrete objects. When we contrast wages and prices, we 
really contrast prices of human services with prices of things ; 
when we contrast rents and prices, we really contrast rental 
values of things with capital values of things. Wages are the 
price of the services of man ; rent is the price of the services 



§ 9o] Value as a Differential, 2 1 7 

of particular things and relations, that is, particular pieces of 
capital ; interest is the price of services of the general fund of 
capital. At the one end is labor, which can never be capital- 
ized ; at the other end is the fund of capital, which is always 
capitalized ; in between are the individual economic goods, 
whose services may or may not be capitalized, and for which 
people will pay either rents or so-called prices. 

90. Value as a Differential. 

All value may be considered as a differential. In each 
variety of goods there will be different grades corresponding 
to different uses. A good boat will rent for more than a poor 
one ; and if it is " no good " at all, it will not rent for any- 
thing. Rent therefore may be measured as a differential from 
a margin or base line of no-rent, and the rent of anything may 
equally well be defined to be the differential return or surplus 
over the no-rent or marginal articles of the class. 

It must, however, not be forgotten that almost everything 
is susceptible either of more than a single kind of use or of 
different uses to different people. The boat may be useless for 
sailing, but good for rowing ; it may be useless for rowing, but 
excellent for firewood. A piece of land may be of no use for 
wheat-raising, but good for alfalfa ; it may be useless for alfalfa, 
but admirably adapted to pasture. The margin or base, there- 
fore, from which rents are calculated may be only a relative 
and not an absolute no-rent margin. The rent of a particular 
plot of good wheat land may be calculated as the surplus 
produce over the worst plot at the margin ; but that no-wheat- 
rent plot may yield a substantial rent as perhaps the best 
of pasture plots. It is only when a given object is of no 
use for any purpose that we can speak of an absolute no-rent 
margin. 

Since therefore the uses of things shade into each other, we 
can take any use as a margin or base from which to measure a 
higher use. The rent of anything may be regarded as a differ- 
ential surplus over a lower use, or as a margin from which to 



2 1 8 Capitalization of Value. [§ 90 

measure a higher use. All value is the expression of marginal 
utility ; each margin is relative as compared to some other 
margin. Rent as the quantitative expression of this marginal 
utility may be estimated either as a whole or as a surplus over 
something else. 

In precisely the same way capitalized rent, or selhng value, 
may be regarded as a surplus. If a fine sail-boat sells for one 
hundred dollars, we can regard twenty dollars as a surplus 
value of a fine boat over a poorer one ; another twenty dollars 
as a surplus of a poor sail-boat over a good row-boat ; and so 
on until finally the last of the hundred dollars will represent 
a surplus of the worst boat over a boat which is not even good 
enough to use as firewood. Again, what is true of rent is true 
of wages. Rent is the income from things, wages the income 
from acts ; both are the income from services. The wages of 
a particular man or class may be regarded as a surplus over 
the wages of a lower grade class, until finally we get to the 
individual who receives no wages at all because he is of no 
use, and who, if he survives, must be supported by the com- 
munity. The law of wages must be the same as the law of 
rent, because wages are really rents of a certain kind, rents of 
acts instead of rents of things. When therefore the traditional 
discourses of economics speak of the rent principle, or of 
"quasi-rents," in the sense of temporary instead of permanent 
or normal surpluses, they are correct as far as they go, but do 
not go far enough. What they really mean is the differential 
principle, which is true of all incomes, whether land rents or 
other rents, whether rents in general or other selling values, 
whether the income of things or that of services. 

When we deal with the fund of value known as capital in- 
stead of with individual pieces of capital, we are also in the 
presence of a differential, but in another sense. Individual 
commodities differ in grade of utility, and therefore their rents 
(and capital values) differ. Capital as a fund, on the other 
hand, is the money value of all existing commodities lumped 
together. Individual commodities are heterogeneous ; the 



B gi] Rental and Capital Values. 219 

fund of capital is homogeneous. There is no general rate of 
rents ; there is a general rate of interest. Hence interest 
cannot be a differential in the same sense as rent. Yet the 
word " interest " itself means difference. Intcresse in Latin was 
the sum that lay between (^inicr) the original loan and its 
return. Although the mediaeval writers confused money and 
capital, thinking that interest was paid for the use of the 
money itself, they nevertheless justified interest, so far as it was 
a recompense for the delay in repayment. We who now know 
that interest is a method of calculating rent realize that it is 
not simply a question of delaying repayment, but of postpon- 
ing enjoyment, and that interest may be measured not only 
positively, but as a differential or surplus of present over future 
values. 

Interest, in other words, is a discount, or difference between 
the present and future. When a banker discounts a bill, he 
deducts from the face value a sum equivalent to the interest 
for the period the bill has to run. Both rent and interest, 
therefore, as forms of value, express an estimate of marginal 
uses. Rent regarded as a differential deals with the marginal 
uses in space ; interest regarded as a differential deals with the 
marginal uses in time. Rent is the difference in the value of 
one present enjoyment over another ; interest is the difference 
in the value of a present over a future enjoyment. How the 
estimate of this difference, or the rate of interest, is arrived at 
in actual life is a matter for later consideration (§ 168). 

91. Relation of Rental and Capital Values. 

Since interest is commuted rent and capital is capitalized 
rent, it might be assumed that rental values and capital values 
of the same things would always vary together. If a house 
rents for the same amount in New York as in Yukon, or if a 
house to-day rents for as much as it did ten years ago, ought 
not the capital value to be the same ? In point of fact, how- 
ever, there is no such exact correspondence between rental 
and capital values. This is due to several causes. 



220 Capitalization of Value. [§ 91 

In the first place, the rate of capitalization is only another 
way of describing the rate of interest. The rate of interest, 
however, or the degree of discounting of the future, differs from 
place to place and from age to age. The rental value, that 
is, the income, of a given railway bond not so long ago was six 
dollars a year, and its capital value one hundred dollars. In 
1905, with no changes of importance in the character or the 
earnings of the railroad itself, the same bond, with the same 
income, was worth half as much again. This increase of fifty 
per cent in the proportion of capital value to rental value was due 
to the fall in the general rate of interest on all similar capital 
from six to three or four per cent. The discount on future en- 
joyments had appreciably diminished. What is true of the part 
of a fund of capital represented by bonds, is true of the indi- 
vidual pieces of capital like a house. Two houses that rent for 
the same amount in New York and Yukon will sell for very dif- 
ferent sums, because the rate of interest is low in New York 
and high in Yukon. The cause of changes in interest will be 
studied later. 

Secondly, since capital value depends on an estimate of 
the future, it is often much more uncertain than rental value. 
It is affected by all sorts of hopes and fears. It is subject 
to the play of speculation. Rental value deals with the 
present moment or the immediate future ; we are reasonably 
certain, so far as anything mundane is certain, of the exact 
quantum of enjoyment. Capital value as a summation of 
more or less distant enjoyments is exposed to all the muta- 
tions of human experience. The same rental values may 
mean now relatively high, and now relatively low, capital 
values. A comparison in 190 1 of 47 industrial corporations 
with 37 railroads showed earnings of 13.6 per cent on the 
market value of the industrial stocks, and 4.85 on that of 
railroad stock. The same income or rental value, in other 
words, represented a difference of almost 300 per cent in 
capital value. Rental values, no matter how they fluctuate, 
are more stable than capital values. That this is true of the 



§ 90 Rental and Capital Values. 221 

fund of capital is obvious to any one who watches the transac- 
tions on the stock exchange. That it is equally true of indi- 
vidual pieces of capital can be seen when we remember that 
in the ante-belluin days of the South, when negroes were 
simply a part of capital, the rental price of slaves in 1820 and 
i860 remained at about the same figure, $110, while the 
capital value of slaves increased from a few hundred dollars to 
$1500 or ^2000. This growing disproportion between capital 
and rental value was indeed due in part to the fall in the rate 
of interest, but in far greater measure to the over-capitalization 
of slaves resulting from the peculiar economic conditions of 
the time. 

Finally, in the third place, where there are special advan- 
tages in the permanent as opposed to the temporary possession 
of certain things, capital values will be relatively higher than 
the rental values. In England a country estate is prized for 
tlie social and political advantages it brings, — and these ad- 
vantages accrue not to the annual tenant but to the owner. 
It is not surprising, therefore, to find that at the end of the 
eighteenth century land in England was worth from twenty- 
eight to thirty years' purchase, while funded property was worth 
only from sixteen to eighteen years' purchase. The dispro- 
portion is less to-day, but still appreciable. 

Capital value is therefore always based on rental value, but 
their relation is not constant. It becomes necessary, there- 
fore, to go a step further and to study the causes which fix 
values in general and which, in explaining relative variations, 
will throw more light on the relation itself. 



CHAPTER XV. 
DETERMINATION OF MARKET VALUE. 

92. References. 

M. Pantaleoni, Pure Ecoitomics (1898), part 2, chs. i-iii; A. Marshall, 
Pri7tciples (1907), bk. v, chs. i-ii; J. S. Nicholson, Principles (1901), bk. 
iii, chs. iii, iv; E. v. Bohm-Bawerk, /'<?«/'/w^ Theory (1891), bk. iv, chs. 
i-vi ; F, V. Wieser, A'atural Value (1893), t>k. ii; A. T. Hadley, Eco- 
nomics (1896), ch. iii ; H. Sidgwick, Principles (1883), bk. ii, ch. ii; A. W. 
Flux, Principles ('1904), ch. iii; H. R. Seager, Inti'odnction (1904), ch. v; 
J. E. Cairnes, Leading Principles (1874), part I, chs. ii, iv; J. A. Hobson, 
Economics of Distribution (1900), ch. i, and Economics of Bargaining 
(Econ. Rev., IX, 1899) ; F. A. Walker, Political Ecofiomy (1888), part 3, 
ch. i. 

93. Demand and Supply. 

All value, as we know, is the reflex of social marginal utility. 
We have now to study the nature of the social forces which 
operate to translate into actual prices on the market the feel- 
ings of the individuals that comprise the group. 

For the purposes of our immediate study it makes no differ- 
ence whether we are dealing with rental or capital values, or 
again with values of services or values of things. The general 
principle of value must be true of all kinds of value. It will 
suffice in this chapter to take as a type the capital or selling 
value of ordinary consumption goods, remembering that every- 
thing here said is equally applicable to all other forms of value. 

It is a truism to affirm that value depends on demand and 
supply. Strictly speaking, demand denotes desire. Since 
one's desire for anything diminishes with additional incre- 
ments, demand is, strictly speaking, the scale of the degree of 
utility. A given scale affords the law of demand. If one's 

222 



§ 94] Market and Normal Price. 223 

desire for anything for some reason increases, so that he is 
wilHng to give more for the same amount, we might in this 
sense speak of a rise in the demand, that is, a change in the 
scale of demand. On the other hand, if there are several 
people who prize the commodity differently, a fall in the price 
would enable more individuals to satisfy their desire, even 
though the scale of demand of each remained unaltered. 
There would really be an extension of the consumption, but 
not of the demand. 

Yet in the ordinary language of economic life demand means 
not simply desire, but effective desire, — a desire which will 
have some effect in the transactions of the market. Demand 
has therefore come to mean elliptically the quantity demanded 
at a given price ; and when we speak of a change in the demand, 
we refer not to any alteration in the subjective scale of desire, 
but to a change in the amount asked for. 

In the same way supply has come to mean the quantity 
offered at a given price in the market. It no longer denotes 
the total amount in existence. That part of the total stock 
which is not offered for sale at a definite price is not an effective 
supply. The grain or cotton that is allowed to rot in the barn 
or on the fields has no influence on the price. 

94. Market and Normal Price. 

By a market was originally meant a place in which individuals 
met for the exchange of commodities and services. Nowadays 
a market means a coming together of offers and demands for 
economic goods, irrespective of the physical presence of the 
contracting parties. The market may be local, national or 
international ; wherever definite quantities of goods are bought 
and sold, there is a market, and the price at which the exchange 
is effected is the market price. 

From the nature of the case this price is subject to tempo- 
rary variations, — the higgling of the market, as Adam Smith 
called it. The point about which the market price oscillates 
is called the normal price, and sometimes, although less 



2 24 Market Value. [§ 94 

happily, the natural price, as being the point to which the 
price would naturally gravitate if there were no oscillations. 
Market price is like the surface of the water agitated by the 
winds, — the waves are now above, now below the surface, 
yet as long as the winds persist we never see the glassy surface. 
The alternate activity of buyers and sellers is the wind of 
commerce, which prevents the normal price from becoming 
visible. 

Normal price itself may be regarded from two points of view. 
If the conditions of production and consumption are perfectly 
stationary — that is, if there are no changes in population, amount 
of capital, methods of production or social demand — we speak 
of static conditions. Such a state is largely hypothetical, 
because in all progressive society conditions are continually 
changing or dynamic. The law is one of movement, not of 
rest. Yet the study of static conditions is important. Static 
normal value is like the level of a pond ; we can study it only 
on the assumption that there is no motion of any kind. 
Dynamic normal value is like the level of an ocean bay, where 
the tide ebbs and flows and the level is slowly changing ; mar- 
ket value is like the surface when agitated by the wind. To 
ascertain the laws of value we must not only study the forces 
that produce the higgling of the market, — that is, the winds 
that disturb the surface ; we must also study the forces which 
change the level of prices, — that is, the strength of the tidal 
current and the conformation of the shores; we must finally 
study the causes of the original level itself, — that is, the source 
of the supply, the volume of the water and the depth of the 
bed. For instance, wages in America oscillate from season to 
season, they have changed from century to century, and at all 
times they have been on a different level from European 
wages. 

We begin, therefore, with the study of market value. We 
must, however, first understand the conditions that make ex- 
change itself possible. 



95] Conditions of Exchange. 225 



95. The Conditions of Exchange — The Law of Comparative 
Utilities and Comparative Costs. 

Let us suppose that A possesses salt and B tea, and that each 
is willing to trade. All that is necessary to an exchange is that 
A's liking for tea as compared to salt should be different from 
B's. It is not necessary that A's preference should be the 
opposite of B's. Both A and B may like tea more than salt, 
but if A likes a pound of tea four times as much as a pound of 
salt, and B only twice as much, they will be willing to exchange. 
If three pounds of salt are given for one of tea, A will be 
satisfied, for he would have been willing if necessary to give 
another pound of salt for the tea ; and B will be satisfied 
because instead of the two pounds of salt, which he considers 
the equivalent of a pound of tea, he gets three pounds. Nor 
does the fact of an exchange tell us anything about the abso- 
lute preferences of the two parties. If A and B are willing to 
trade tea and salt, pound for pound, it does not follow that A 
likes tea more than B, or that B likes salt more than A. A may 
like salt more than B and yet give it up, provided he likes the 
tea much more than salt, and at the same time likes both tea 
and salt much more than B does. Suppose A gets ten units of 
satisfaction from a pound of tea and five from a pound of salt, 
while B gets one unit of satisfaction from a pound of tea and 
two from a pound of salt. B will then give up the tea because 
he saves one unit, and A, although he likes salt more than 
B does, will give it up because he saves five units. 

The fact of exchange thus tells us only that A's liking for 
salt as compared with tea is different from B's ; it tells us 
nothing as to whether A likes salt more than tea, or whether 
A likes either salt or tea more than B. In technical language, 
an exchange tells us only that there is a disparity in the mar- 
ginal utilities of the articles for the two parties, or that there is 
a difference in the reciprocal demand ; it tells us nothing as to 
the marginal utility of either commodity for either party. The 
rate of exchange depends on the degree of this disparity, and 

IS 



226 Market Value. ' [§ 96 

the law of exchange may be stated as the law of comparative 
marginal utilities, or the law of reciprocal demand. 

A and B, however, had to secure their salt and tea. It cost 
them something. A difference in reciprocal demand means a 
difference in the demand as compared to the supply. This is 
the same as saying that it is a difference in the supply as com- 
pared to the demand. When we speak of supply we think of 
marginal cost, just as when we speak of demand we think of 
marginal utility. Exchange may therefore be explained in 
terms of cost as well as in terms of utility ; and the law of 
exchange may equally well be stated as the law of comparative 
costs. I may be so much more intelligent than my furnace 
man that I could save much coal by tending the furnace 
myself; yet I prefer to look after my business, and let him 
tend the furnace, because it pays each of us better to do so. 
The law of comparative costs and of reciprocal demand is the 
foundation, not only of international trade as the older econo- 
mists explained, but of all exchanges, that is, of all economic 
transactions. 

96. The Rate of Exchange — Barter. 

Having ascertained the fundamental condition of exchange, 
let us now turn to the rate of exchange. Suppose that A and 
B both like tea more than salt. A begins by offering ten 
pounds of salt for one of tea, but really wants it so badly 
that he would if necessary go as high as sixty for one. B, 
on the other hand, is willing to give up some tea, but only 
at the rate of one pound of tea for twenty of salt. At the 
same time he thinks that A needs tea far more than he (B) 
cares for the salt, and therefore begins by saying that he will 
take not less than seventy pounds of salt for one of tea. 

It is plain that an exchange can take place only between 
the limits of twenty and sixty pounds of salt for one of tea. 
At anything under twenty,"B will not exchange ; at anything 
over sixty, A will not exchange. The lower and higher offers 
originally made by each are excluded by the desire of each 



§ 96] Rate of Exchange. 227 

to come to terms. Only between the limits of twenty and 
sixty will an exchange be profitable to both. 

The question still remains : what will be the exact rate be- 
tween these limits? In pure theory there must be a point 
between twenty and sixty where the gain of both in surplus 
enjoyment is at a maximum. The location of that point de- 
pends on the comparative desire of each for both commodities. 
If A prefers tea to salt much more than B does, the exchange 
will be made at a figure close to sixty ; for even though A 
offers only twenty or thirty for one, his anxiety to get more tea 
will be greater than B's desire to get the salt at that rate, and 
will lead him to increase the offer. With every increase in 
the rate, A's desire for more tea will fall, and B's desire for 
more salt will rise ; but as A's origuial desire is much greater 
than B's, the point at which the relative desires become equal 
must be one comparatively favorable to B, that is, near sixty. 
If, on the other hand, A prefers tea to salt only slightly more 
than B does, the rate will be nearer twenty. Whatever the 
relative preference, there is a point which gives both a total 
maximum benefit. 

This is strictly true, however, only of divisible commodities 
or articles sold in stocks, where any unit possesses a propor- 
tionate value of the whole. Where there is no stock, or where 
the commodity cannot be divided without some loss of value, 
such an exact point between the limits may not be found. 
The relative desires of A and B changed because of the 
minute alterations in the supply of each commodity. But if 
the tea and salt were in ten-pound bags, or if A and B were 
exchanging hens and pigs, the units could not be divided, and 
it might happen that at least one party would get either a little 
more or a little less than he anticipated. 

Even with divisible commodities, however, the theory as- 
sumes that equal knowledge, equal opportunity and equal 
capacity are found on both sides. When these conditions are 
lacking, as is usually the case in such an isolated transaction, 
the actual rate of exchange will depend largely on the superior 



2 28 Market Value. [§97 

shrewdness or good fortune of the one party in gauging the 

strength of the other. If A can conceal his intentions better, 

the rate will be favorable to him; if B can " bluff" better, it 

will be the reverse. The keener and more adroit trader will 

make the greater gain. In practice, therefore, the rate of 

exchange will usually be at almost any point between twenty 

and sixty. 

97. One Seller and One Buyer. 

Let us now go a step further and suppose that both parties 
are acquainted with the use of money, and that A has money 
instead of salt, while B is willing to give up his tea for cash 
instead of salt. In other words, A wants to buy tea and B to 
sell it. Instead of barter we now have purchase and sale. 
Substituting a cent of money for a pound of salt, A offers as 
before ten cents (instead of ten pounds of salt) for a pound of 
tea, and B says that he will take not less than seventy cents. 

If the desire of A and B for money is as different as was their 
desire in the preceding case for salt, the problem will be pre- 
cisely the same. This is sometimes true in actual life. A dollar 
is worth more to a poor man than to a rich man, — its marginal 
utility is greater. A physician will charge a wealthy patient for 
an operation far more than a man in modest circumstances. 
The price of an old master or a mediaeval missal will often 
depend largely on the wealth of the purchaser. But in the 
ordinary transactions of life, where we deal in masses of com- 
modities, and where the sum devoted to the purchase is only 
a fraction of the purchaser's wealth, this difference in the 
worth of money may be neglected. Prices on the produce 
exchanges for cotton or wheat are rarely affected by the fact 
that some of the dealers are richer than others. The great 
advantage of the use of money is that in ordinary transactions 
its marginal utility to both parties may be deemed the same. 

The problem is therefore simplified. The rate of exchange- 
was so arbitrary, because as K and B got more or less of salt 
as compared with tea, the marginal utilities of each commod- 
ity varied. But now since A and B desire to buy or to sell 



§ 97] One Seller and One Buyer. 229 

tea only, and as we assume that the value of money remains 
constant, the price that each is willing to pay depends only on 
their relative demand for tea. In technical language, the 
rate of exchange is, as before, conditioned by the disparity in 
the marginal utilities of the two commodities ; but since the 
disparity due to the changes in the utility of money to each 
is now negligible, the total disparity is less than before. If, as 
is possible, this relative demand of A and B for salt in the 
original illustration was responsible for a variation of ten points 
in each case, the limits within which a pound of tea will now 
change hands are reduced from the original figures of twenty 
and sixty (pounds of salt) for one of tea, to thirty and fifty 
(cents) for one pound of tea. That is, if we neglect the va- 
riations due to difference in the marginal utility of money, the 
price of a pound of tea will be somewhere between thirty and 
fifty cents. Within these limits it will still be arbitrary, where 
A and B are the only buyer and seller. 

The cases thus far discussed are not typical of ordinary busi- 
ness transactions. People no longer barter with each other, 
nor does it often happen that there is only a single buyer and 
a single seller. An example would be the agent of a collector 
of curios meeting a farmer who is persuaded into selling an 
old piece of furniture. Ordinarily, however, there will be 
either a number of buyers or a number of sellers, — and often 
of both buyers and sellers. In such cases we speak of compe- 
tition, because sellers and buyers compete with each other to 
secure the most favorable terms for themselves. When we 
use the term competition we usually mean mutual competition, 
/. e. competition on both sides. In the case of one seller and 
several buyers, we speak of monopoly ; we neglect the com- 
petition because it is only one-sided, — between the buyers. 
There may also be the reverse kind of one-sided competition, 
as when several sellers deal with only one buyer. This is some- 
times called " buyer's monopoly," — an expression which is clear 
enough, although etymologically not quite exact, as the term 
monopoly literally implies " one-seller " and not " one-buyer." 



230 Market Value. [§ 98 



98. One Seller and Several Buyers, or One Buyer and 
Several Sellers — Monopoly. 

Let us now take the case where several A's desire to pur- 
chase tea from the monopohst tea-dealer. A, as we have seen, 
will not give at the outside more than 50 cents ; suppose that 
the limit of A^ is 48 cents, of A^ 45 cents, and of A^ 38 
cents. If A' were the only buyer, the price could not rise 
above 38 cents, and might be much below it. But now 
appears A^, who is willing to go as high as 45 cents. If each 
buyer is ready to take B's whole stock, it is plain that com- 
petition between A^ and A^ will drive the price above ;^8 cents, 
whereupon A' will fall out. The rate of exchange can there- 
fore fluctuate only between 38 cents and 45 cents. If A-^ now 
steps in and is ready to buy the whole stock. A" will be shut 
out and the price will fluctuate between 45 cents and 48 cents. 
Finally, if A appears, A^ will be excluded and the price will 
fluctuate between 48 cents and 50 cents. In other words, 
when we have competition between the buyers, the rate of 
exchange is limited above by the highest off"er made by the 
buyer to whom the rate is most unfavorable (the 50-cent rate 
of A), and below by the highest ofler of the buyer next on the 
scale (the 48-cent rate of A^). Thus the arbitrariness of the 
rate of exchange is limited. 

There are two methods by which this result can be reached. 
In an ordinary auction sale, the monopolist seller asks for the 
lowest offer for the whole supply ; but even here there is often 
an upset price, that is, a price below which the seller will en- 
tertain no bids at all. That represents the 30-cent limit of B. 
With each increase in the bid, some of the would-be buyers 
fall out, until finally A^ stops at 48 cents. At an auction A 
will then get the tea at just above 48 cents; if it were an 
open sale, and if B were not willing to sell at that figure, A 
might go as high as 50 cents. On the other hand, when a 
municipal government offers to sell bonds, each of the would- 
be purchasers, all of whom must submit their bids at the same 



§ 9^] One Seller and Several Buyers. 231 

time in writing, naturally offers the highest price at which he 
thinks he can distance his competitors and yet make a profit 
for himself. Here buyers who offer to take the entire issue 
are often given the preference, and each is driven to his maxi- 
mum limit, not by the actual rising bids of his predecessors, 
but by his fear of their competition. This is sometimes called 
the Dutch-auction system, but it occurs in certain transactions 
in the United States and other countries as well. 

What has been said is equally true, ftiutatis mtttandis, of the 
case of one buyer and several sellers. Suppose that several 
tea-planters, B's, desired to sell their crop to a wholesale mer- 
chant, A, who has in some way monopolized the business of 
supplying the retail dealers. A, as before, will not pay more 
than 50 cents, but B^ is willing to sell at t,^ cents. Now 
comes B^, who says he will accept an offer of 34 cents ; B^ is 
evidently shut out and the price will fluctuate between 34 and 
2,^ cents. If B^ is ready to sell at 31 cents, B'^ will be shut 
out and the rate will fluctuate between 34 and 31 cents; if B 
finally enters the market, B^ is excluded, and the limits of 
sale will be between 30 and 31 cents. 

Such cases are much rarer than the preceding. For it is 
more difficult in practice to monopolize the demand for an 
article than it is to monopolize the supply. Yet instances 
will readily occur, as where tenders are invited from several 
persons to supply a definite demand, either of a government 
office for articles like clothing or armor-plates, or of a private 
individual for the construction of a house or the making of re- 
pairs of any kind. The person inviting the tender is in this 
transaction a monopolist buyer, and each of the rival bidders 
now hastens to make his lowest offer at the very beginning in 
order to forestall his competitor. The contract goes to the 
lowest bidder for the whole amount. 

In what has preceded we have assumed for the sake of sim- 
plicity, that each of the buyers is ready to take the whole 
amount offered, or vice versa, that each of the sellers is in a 
position to offer the whole amount demanded. Oftentimes, 



232 Market Value. [§ 98 

however, this is not true. In the ordinary case of monopoly 
sales, competing buyers are usually ready to take only a part of 
the stock. It is instructive to study what the results are under 
such conditions. 

Suppose that the four A's desire different quantities of 
tea. A, let us say, desires 400 lbs. and is willing to pay up to 
50 cents a pound for the first hundred pounds if he cannot 
get any more, 48 cents for the second hundred, 45 cents for 
the third and 38 cents for the fourth ; A^ desires 300 lbs. and 
is ready to pay not more than 48 cents for the first hundred, 
45 cents for the second and 38 for the third ; A^ wishes 200 
lbs. and will go to 45 cents for the first hundred and 38 cents 
for the second; finally, A^ wants loo lbs, and will give 38 
cents a pound. Now, if B has only 100 lbs., /. e. if each of the 
buyers bids for the whole stock, we have seen that A will force 
the price up to 48 cents, and may even go up to 50 cents. A 
will thus secure the entire supply. If. however, B has more 
than 100 lbs. to sell, some of the buyers (A"^) will not bid 
for the total amount. As a consequence both the price and 
the quantities which each purchaser secures will vary. Sup- 
pose that B has 300 lbs. A and A^ between them will bid 
the price up to 45 cents in order to exclude A^ and the price 
will vary from 45 cents to 48 cents. At any such price A will 
not get more than 200 lbs., for although he is willing to pay up 
to 48 cents for his second hundred, he finds that A' is ready to 
pay just as much for what is his first hundred ; and while A is 
willing to give up to 45 cents for his third hundred, A^ is ready 
to pay as much for his second hundred. A cannot escape the 
competition of A^ except as to 100 lbs. The result is that the 
price for the whole 300 lbs. must be the same to both, that is, 
at some point between 45 cents and 48 cents, and that A will 
get 200 lbs. and A^ 100 lbs. at that price. 

If B has 600 lbs., it can be shown by the same reasoning 
that the price must be between 2i^ cents and 45 cents, and 
that A will get 300, A^, 200, and hP-, 100 lbs. The price can- 
not fall below 2,% cents, for otherwise A^ would get some tea. 



§ 99] Several Sellers and Buyers. 233 

— a condition whicli all the others are interested in pre- 
venting, as they know that there is not enough to go around. 
But although A^ is shut out, A^ cannot get more than 100 lbs., 
because if there were any danger of his doing so, A^ and A 
would fear to lose some of their share and bid the price up 
above 45 cents, which A- cannot afford. For the same reason 
A^ cannot get more than 200 lbs., for A would then bid the price 
above 45 cents, which A^ cannot afford for his second hundred ; 
and, finally, A cannot get more than 300 lbs., for he would 
have to exclude A^ by offering more than 45 cents, which A 
cannot afford for his third hundred. 

Thus in all such cases the rate of exchange will vary be- 
tween 38 cents and 50 cents, according to the relative demand 
of each of the buyers. By the same reasoning it might be 
shown that where we have one buyer and several sellers the 
rate would vary from 30 cents to 38 cents. In each case of 
such one-sided competition the arbitrariness of the rate will be 
less than where there is no competition at all. 

99. Several Sellers and Several Buyers — Competition. 

We now come to the final case, so generally found in actual 
life, where there are at the same time several buyers and 
several sellers, that is, where there is competition on both sides. 
They all meet, either in person or through agents, on the tea 
exchange. Each buyer desires to purchase a certain quantity 
of tea, but all the buyers together are ready to take more than 
is offered, provided they can get a satisfactory price ; each 
seller wishes to dispose of a certain quantity, but all the sellers 
together would be ready to sell more than there is a demand 
for, provided they can get a satisfactory price. In other words, 
each desires to do as much business as he possibly can with 
profit. Under such conditions the market price of the tea 
must be 38 cents, not more and not less. There will be no 
variation at all. 

For if the price fell to 37 cents some of the sellers (repre- 
sented by B^) could not afford to sell, and with the shortage 



234 Market Value. [§ loo 

in the supply all the buyers together could not get as much as 
they want ; they would therefore bid against each other, in the 
fear of not getting enough, and the price would rise. It could, 
however, not go above 38 cents, for if it were driven say to 39 
cents, some of the buyers (those represented by A®) could not 
afford to buy. With the falling off in the demand, each of the 
sellers would fear to be the unlucky one who failed to dispose 
of his stock ; the sellers (B's) would therefore vie with each 
other in reducing the price until it fell to 38 cents. 

Thus we see that while in the case of one buyer and one 
seller the rate of exchange is arbitrary (between 30 cents and 
50 cents), in the case of competition on either side the lim- 
its of variation are reduced (between 30 cents and 38 cents, 
or 38 cents and 50 cents respectively), and in the case of 
competition on both sides, the limits meet, that is, the arbi- 
trariness disappears and the rate of exchange is fixed (at 38 
cents). 

100. Conclusions. 

From the above analysis follow certain important conchisions : 
(i) Under free competition there can be at a given time 
and place only a single price for the same commodity. The 
price of tea must be 38 cents to all ; if it were less or more, 
the pressure of the competing buyers or sellers would at once 
operate to bring it back to that point. The exceptions to the 
rule are only seeming. It may happen, for example, that on 
an exciting day on the stock exchange, when there are violent 
fluctuations in the market, the same securities may be sold at 
the same time in two different groups at different prices. Here, 
however, there is no perfect competition ; there are really two 
separate markets, the members of which have no direct con- 
nection with each other. As soon as the icxcitement dies away 
and the groups of buyers and sellers coalesce, the market be- 
comes a unit, competition is again perfect and the price is the 
same throughout. In the same way a firm may do both a retail 
and a wholesale business, and sell the same article foK different 



§ loo] Conclusions. 235 

prices ; but plainly there are two separate markets. Again, 
some purchasers have to pay more because their credit is not 
good ; but there is no perfect competition, because the buyers 
are really offering different things in exchange. Finally, some 
sellers may ask less because they are ignorant of the market 
conditions, or may grant lower rates to large purchasers be- 
cause the transactions are secret. In no instance where there 
is a perfect competition can there be more than one price for 
the same thing at the same time. 

When competition is absent on one side, that is, in the case of 
monopoly, this principle does not apply. Since the object of 
the" monopolist is to make the greatest possible net profits, it is 
to his interest to sell each increment of his supply at the highest 
possible price. If we refer to the example above (p. 232), it 
will always be to the interest of the monopolist tea-dealer who 
has a stock of 300 lbs. to sell 100 lbs. to A at a price over 48 
cents, and the other 200 lbs. to A and A^ at a price be- 
tween 45 cents and 48 cents, rather than to sell the 300 lbs. 
at the lower price. The monopolist will not generally be able 
to do this, for he may be selling in a market where he must 
seek to dispose of his whole stock without perfect knowledge 
as to the conditions of the consumers. Wherever he can, how- 
ever, he will make different prices to different persons, and if 
possible will even sell different increments of the supply at 
different prices to the same person. Thus not only does the 
Standard ^1 Cornpany find it profitable to charge different 
prices for its oil, but the makers of particular brands of soap 
or chocolate, which give them to that extent a monopoly, are 
in the habit of putting the same soap or chocolate into differ- 
ent packages and selling them at different prices, in the ex- 
pectation that different grades of purchasers will be attracted. 
Under competition this would be impossible. 

(2) In the case of competition the market price is always 
the one at which the greatest number of exchanges can be 
effected. If the price fell below 38 cents, some of the sellers 
could not dispose of their tea ; if the price rose above 2^ cents. 



236 Market Value. [§ 100 

some of the buyers would be unable to secure tea. la either 
case some would go unsatisfied. When the determination 
of the market price is left to a superior authority, as on 
the Berlin stock exchange, we have a good illustration of 
the principle. There the bids and offers, in writing, are so 
adjusted by a committee that although no one pays more 
or receives less than he intended, some may pay less or 
receive a higher price for such quantities as are needed to 
balance the transaction, with the result that some bids or 
offers which would otherwise have been excluded are finally 
accepted. 

In the case of monopoly the principle does not apply. 
Since the monopohst controls the supply, he may secure a 
greater net return by selling a smaller quantity at higher prices 
rather than a larger quantity at lower prices. The exact point 
at which he can sell the largest quantity at the greatest profit 
depends on the rapidity with which the scale of demand in- 
creases as the supply falls off. If the monopolist is in posses- 
sion of 600 lbs. of tea, the entire stock in the market, whether 
he sells 600 lbs. for 50 cents or 500 lbs. for 60 cents, will 
be immaterial to him. But if he finds that by his offering only 
500 lbs. the price will rise to 65 cents, he will naturally offer 
only this quantity, and destroy the other 100 lbs. In the case 
of competition he would not dare to do this, because his com- 
petitors would continue to supply the market at approximately 
the old price ; and he would be compelled to accept this price 
for his reduced quantity. Had the Dutch_EIasl India Com- 
V pany not possessed a monopoly, it would not have destroyed a 
part of its stock of spices in order to secure greater profits 
from the sale of what remained. When some of the misguided 
Alabama planters burned a part of the cotton crop in 1904 in 
order to raise the price of the remainder, it was on the assump- 
tion that every other planter would burn his proportionate 
share, — an assumption as rash as it proved to be unfounded. 

(3) If by demand price we denote the price offered by the 
buyers, and by supply price the price asked by the sellers, the 



§ loo] Conclusions. 237 

marginal demand price is the lowest, as the marginal supply 
price is the highest, price that is actually accepted. The 
market price must always be the price where the marginal 
demand and marginal supply prices meet. The market price 
is therefore in cases of competition always the marginal price. 
In the example given above the marginal purchaser is A^ ; the 
marginal seller is B*. A' 's marginal offer to purchase, /. e. 
his demand price, is 38 cents ; B* 's marginal offer to sell, 
i. e. his supply price, is t^'$, cents. If A^ was originally will- 
ing to go as high as 39 cents, while B^ was ready to sell at 38 
cents, these would not be final marginal figures ; for either 
there would be an A^ not willing to go quite so high and a B* 
demanding a little higher price ; or A^ would not give as much 
as 39 cents for a further increment, and B^ would not be willing 
to let a further increment go for as little as -^Z cents. There 
would inevitably be some point between 38 cents and 39 cents 
where the mutual competition of the A's and B's would meet, 
and which would mark the marginal offers of A^ and B^ 
respectively. 

The difference between the actual market price and the non- 
marginal offers represents the surplus. In the case of the sellers 
who get the money, the surplus is called a profit ; in the case 
of the buyers who get the tea, the surplus is a consumer's sur- 
plus if they drink the tea, or a profit if they sell the tea. B*, 
who sells the tea for 38 cents, makes no profit. His offer to 
sell for 38 cents is the marginal offer, because at that point he 
ceases to have any inducement to exchange. But B^ would 
have been willing to take 34 cents, and therefore makes 4 cents 
a pound profit; B\ whose limit was 31 cents, gains 7 cents; 
and B with a limit of 30 cents gains 8 cents. On the other 
hand. A, who buys the tea for 38 cents, would have been willing 
to go to 50 cents. If he drinks the tea, this difference of 12 
cents represents a surplus satisfaction to him ; if he was willing 
to give 50 cents because he knew he could sell it for that, the 
12 cents represent his profit. A\ whose limit was 48 cents, 
secures 10 cents surplus, A*^ with a limit of 45 cents gets 7 



238 Market Value. [§ 100 

cents surplus, while A^, whose limit, 38 cents, is equal to the 
price, enjoys no surplus at all. 

The marginal buyers and sellers (those who fix the price) 
thus neither make nor lose ; there will be nobody beyond the 
margin because he would lose ; while all those within the mar- 
gin — the intramarginal buyers and sellers — make a gain, 
measured either in money or in enjoyment. The gain — 
whether profit or consumer's surplus — has, however, no effect 
on the price. 

In the case of monopoly there is generally no marginal 
price, because there is only one seller or one buyer respec- 
tively. In the ordinary case of one seller there are indeed 
many buyers, one of whom makes a marginal offer or demand 
price, while the intramarginal buyers gain. But as the seller 
has control of the supply, there is only one supply price, — 
no higher or lower supply prices, and therefore no marginal 
supply price. It is barely conceivable that the relative state 
of demand and supply is such that the seller is compelled, in 
order to dispose of anything at all, to reduce his price to a 
figure so low that even the least anxious purchaser can get 
what he wants at his own valuation. In such a case the 
monopolist makes no gain ; his supply price would be the 
marginal demand price. But, except in this almost impossible 
case, the monopolist will be able to charge more, and the 
market price will not be the marginal price. Market price is 
always the price at which the demand price and the supply 
price meet each other; in all but the most exceptional cases 
monopoly market price is not a marginal price. 



CHAPTER XVI. 
DETERMINATION OF NORMAL VALUE. 

101. References. 

N. G. Pierson, Principles {1902), part i, chs. i, vii ; A. Marshall, Prin- 
ciples (1907), bk. iv, ch. iii, and bk. v, chs. iv-vii ; E. v. Bohm Bawerk, 
Positive Theory (1891), bk. iv, ch. vii, and Karl Marx and the Close of his 
System (trans, by MacDonald, 1898); F. v. Wieser, Natural Value (1893), 
bk. v; M. Pantaleoni, Pure Economics (1898), part 2, ch. iii; J. S. Nichol- 
son, Principles (1901), bk. iii, ch. v; J. E. Cairnes, Leading Principles 
(1874), part I, ch. iii; T. N. Carver, Distribution (1904), ch. ii ; F. A. 
Fetter, Principles (1904), ch. viii ; A. W. Flux, Principles (1904), chs. iv, 
v; A. T. Hadley, Economics {1896), ch. iii; H. Sidgwick, Principles 
(1883), bk. ii, ch. ii; J. R. Commons, Distribution of Wealth (1893), 
ch. iii ; H. G. Kittredge, Utilization of Wastes and By- Products in Twelfth 
Census, X, 7215-748; A. C. Whitaker, History and Criticism of the Labor 
Theory of Value in English Political Economy in Columbia Studies, XIX 
(1904) ; J. B. Clark, Essentials 0/ Economic Theory (1907), ch. vii. 

102. Normal Demand — Elasticity of Demand. 

In the discussion of market value we studied the process by 
which the temporary demand and supply balance each other. 
In the discussion of normal value we must consider the influ- 
ences which affect the more permanent demand and supply. 
In our example it was assumed that the temporary demand 
and supply were such that tea sold for 38 cents. The question 
now arises, why did tea sell for 38 cents rather than for 3 
cents? The study of normal value is the study of normal 
demand and of normal supply. 

Since the demand for a commodity means the quantity 
desired at a given price, a change in the demand may take 
place without being caused by any change in the price. When 

239 



240 Normal Value. [§ 102 

ostrich feathers went out of fashion a few years ago, the de- 
mand fell off to such an extent that prices went down and 
production was curtailed. The supply adjusted itself to the 
smaller demand at the lower price. The change in demand 
was, in last analysis, the cause of the change in price. 

Ordinarily, however, demand is affected by the price. We 
speak of demand being elastic when a change of price pro- 
duces a marked alteration of demand, demand falling or rising 
as the price goes up or down. Every commodity has its own 
law of demand. There are as many degrees of elasticity of 
demand as there are variations in human wants and the ability 
of men to satisfy these wants. Demand may be relatively 
inelastic or stiff, either in the sense of being constant or in the 
sense that it will be completely destroyed by any increase of 
price. 

(i) The best example of inelastic demand in the first sense 
is salt. A fall in price will not induce us to eat more ; an inr 
crease of price will result in almost no falling off in demand. 
Nevertheless the demand is not completely inelastic, because 
if the price rises enough the poor may be compelled to curtail 
its use, even if it involves disease and decimation. Somewhat 
analogous in this respect to necessities are high-priced luxu- 
ries. The purchasers of pearls are not quite so likely to be 
held back by a moderate increase of price as would be the 
less well-to-do consumers of cheaper commodities. Yet the 
demand for pearls is relatively inelastic only at one end of 
the scale ; even a slight decrease of price might augment the 
demand considerably. 

(2) The other case of inelastic demand may be illustrated 
by oleomargarine. If the price were to rise beyond a certain 
point, the demand would be completely destroyed, and it 
would be replaced by butter. Even here, however, the de- 
mand is inelastic only beyond that limit ; within it, a decrease 
of price means an increase of demand. With well-nigh every 
commodity the demand will be annihilated if the price is 
forced high enough. 



§ I02] Elasticity of Demand. 241 

The proper statement, then, is not that demand is quite 
inelastic, but that every commodity has its own relative degree 
of elasticity of demand. The demand for some things is far 
more expansible than for others ; a fall in the price of cotton 
will mean a greater increase in demand than a proportionate 
fall in the price of books. 

While utility lies at the foundation of value, some commod- 
ities can be utilized only in combination with others. A bow 
is of no use without an arrow ; a pen is worthless without ink. 
The demand for such complementary goods is a composite or 
joint demand : we want the pen and the ink together, we 
want neither of them separately ; but when we know that we 
can get the one, we want the other. The demand for either 
of two complementary goods is thus an indirect or derived de- 
mand, and the elasticity of a derived demand often differs 
from that of a direct demand. 

If the price of both complementary goods rises, the demand 
for each will normally fall. But if the price of only one of the 
complementary goods rises, the demand for it will not fall to 
the same extent. If both ink and pens rise in price, more 
people will use pencils. But if the price of ink remains the 
same, the price of pens must rise far higher before the pur- 
chaser will be driven to accept a substitute. The demand for 
one of two complementary goods is more inelastic than the 
demand for a commodity which possesses independent utility. 
Direct demand is more elastic than the derived demand which 
.flows from the existence of joint demand. 

In modern life the sphere of joint demand is continually 
growing. Production is becoming more complex, and the 
demand for most goods used in production depends more and 
more on the possibility of combining them with others. Con- 
sider the numberless things that go to make up a steamship. 
Some of them possess a direct utility for other purposes ; but 
to the extent that their value largely depends on the demand 
of shipbuilders, most of them may be considered complemen- 
tary goods. The more complex our productive processes and 

16 



242 Normal Value. [§ 103 

the more refined our methods of consumption, the greater is the 
sphere of joint demand. The more striking also are the effects 
which changes in demand for one commodity produce on the 
demand for others. The demand for bicycles affected the 
demand for horses ; the introduction of tlie railway revolu- 
tionized the demand for coaches and for country inns. The 
demand for any commodity is in one sense dependent upon, 
or derived from, the demand for other commodities. 

Whatever the nature of the demand, however, whether 
direct or complementary, whether stiff or inelastic, as long 
as there is any permanent demand at all, there will be an 
effort on the part of society to fill the demand. Inasmuch as 
all value depends on the relations between demand and supply, 
it becomes necessary to study the forces which influence the 
permanent supply. 

103. Normal Supply — Cost of Production. 

We have learned above (§ 89) that valuable things may 
be divided into four classes, namely, human services, concrete 
commodities, relations and privileges, and a fund of capital in 
general. It must be noted, furthermore, that economic goods 
are also divisible into goods of which the supply cannot be 
increased, like favored sites of land, waterfalls, old pictures 
and. coins, or unique examples of anything ; and, secondly, 
into reproducible goods. 

The discussion of market value and the preceding remarks 
on normal demand apply to all the above classes. In treating 
of normal supply, however, it is advisable to study first those 
concrete things which can be duplicated. The great mass of 
commodities can be increased in quantity, and the progress of 
society depends ultimately on this increase. We shall there- 
fore restrict the discussion in this chapter to those reprodu- 
cible commodities, and reserve for the next chapter the study 
not only of those concrete goods whose quantity is fixed, but 
also of the other embodiments of value. 

Sometimes a commodity is picked up by chance, as when 



§ I03] Cost of Production. 243 

we stumble across a gem or an unexpected deposit of gold. 
Clearly, however, we cannot depend on such accidental finds 
for a permanent supply ; as soon as we search for them we are 
purposely spending time and labor on their acquisition. Since 
therefore all goods whose quantity is susceptible of increase 
are acquired (or, in technical language, produced) by efforts, 
they cost something to produce. In a society which uses 
money this subjective pain cost is translated into a money 
cost, or what is ordinarily called the expenses of production. 
Hence it is usually stated that the normal supply price of 
commodities — that is, the price at which producers in the 
long run are willing to sell their supply — depends on cost of 
production. 

In making this statement, however, we must be careful to 
define both branches of the term cost of production. By 
production we do not mean particular production ; by cost we 
do not mean individual cost. 

( 1 ) Cost of production does not necessarily mean the cost 
of producing the particular commodity in question. The labor 1^ 
expended on a commodity has no necessary influence on its 
price. A yard of cotton cloth may have cost twenty cents to 
produce ; if through some new invention the same cloth can 
now be produced for ten cents, the price of the old supply will 
no longer be twenty cents. It is evident, then, that when we 
speak of cost of production we mean the cost of continuous 
production or cost of reproduction. If cotton cloth can be 
duplicated or continuously produced (/. e. reproduced) for ten 
cents a yard, the supply price will remain ten cents. It is only 
where the cost is a constant cost, that is, where cost of produc- 
tion is equivalent to cost of continuous production or repro- 
duction, that the supply price depends on the cost of production. 
When cost of production and cost of reproduction diverge, it 

is only the latter that aff'ects value. 

(2) Secondly, cost of production does not mean individual 
cost. Value, as we know, is a social conception ; the real cost 
of production which affects value is the socially necessary cost. 



244 Normal Value. [§ 103 

The important point is not that a commodity costs the producer 
something, but that it saves the consumer something. It may 
save one consumer more than another, but its value depends 
on what it saves the social group as a whole. This saving of 
social cost is what is meant by socially necessary cost. I may 
spend much time on something which will have no sale because 
it does not suit the social demand. The commodity will then 
of course not be duplicated ; there will be no cost of repro- 
duction. The markets are full of such examples of misdirected 
labor, which involve the producer in loss. A new shirting, for 
instance, fails to strike the popular fancy; a new brand of 
tobacco attracts no notice. If, on the other hand, the product 
fills a social demand, the producers will adjust their output and 
their exertions to this demand. The cost to the individual 
producer will adjust itself to the socially necessary cost, that is, 
the amount which the purchasers as a group are willing to give 
rather than make the article themselves. If the individuals 
cannot reduce their cost, they will stop producing; if they 
reduce their cost below this point, the point itself will move. 
Society will not be willing to give more, because what the pro- 
ducers can do, the rest of society can, if necessary, do. It is 
in this way that an equivalence is brought about between indi- 
vidual and social cost ; and it is only because of this equivalence 
that cost of production may be said to influence value. 

When therefore we affirm that the normal supply price 
depends on cost of production, we must remember that we 
are speaking only of reproducible goods, and that the state- 
ment is true only in the sense, first, that production means re- 
production, and, secondly, that cost means socially necessary 
cost, — not pains (or their money equivalent) taken, but pains 
saved. When individual and social cost diverge, value does 
not depend on individual cost of production; when they meet, 
value may be expressed in terms of either. It is only because 
individual cost tends to adjust itself to the ^socially necessary 
cost that we can roughly speak of the price of anything de- 
pending on its cost of production. 



§ 104] Law of Marginal Cost. 245 

104. La-w of Marginal or Maximum Cost. 

The term cost of production must be further defined. 
Whenever there is more than one producer, there will be dif- 
ferent costs of production. Producers differ in ability or in 
opportunity. While all similar units in the supply sell under 
competitive conditions at the same price, the superior skill of 
some employers or the more fortuitous combination of other 
causes enables some to produce more cheaply than others. If 
the cheaper producer could supply the whole market, he would 
secure a monopoly. But while all producers seek to sell as 
much as they can, it only rarely happens that any one can 
furnish the entire supply. Whenever there is competition, there 
are different costs of production. 

It may conceivably happen, indeed, that all the producers at a 
particular moment are men of precisely the same abilities and 
subject to the same conditions. In this possible case — which 
is apt to be true only of newly started industries — there would 
indeed be only one identical cost for all units of the supply. 
There could then, however, not be any permanent profits to all 
the producers, because prices could not permanently remain 
above the mere cost of production. If there were profits to all 
the producers, competition would surely induce one of them to 
lower the price in the hope of securing larger profits through 
greater sales ; or if he did not do this, some new producer 
would enter the field and cut prices. The only way in which 
prices could be permanently kept at the old level would be 
through some control of the supply. We should, however, then 
no longer have free competition, but should be in the presence 
of some form of monopoly. Permanent production at the same 
cost for all units of the supply almost always involves some 
form of monopoly. 

Since, therefore, there is in case of competition no uniform 
cost, the question arises, when we speak of prices depending on 
cost of production, which cost? It can manifestly not be the 
lowest cost. If at any moment there are five firms supplying 



246 Normal Value. [§ 104 

the entire market for cotton goods, at a cost to each of six, 
seven, eight, nine and ten cents a yard respectively, it is clear 
that the price will not be six cents, for all except the six-cent 
producer would then lose money and stop. Nor can the price 
be fixed by the average cost of production, as is often carelessly 
stated. For if the price were the average cost, that is, eight 
cents, the nine and ten cent producers would lose and withdraw 
their capital. As long as the demand is large enough to keep 
all the producers in business, the price must be ten cents, — 
corresponding to the greatest or maximum cost. It cannot be 
lower than ten cents, for otherwise the ten-cent producer would 
step out ; it cannot be higher than ten cents, because in their 
mutual endeavor to capture more of the market the price will 
be kept down to the lowest point consistent with continuous 
production. 

This maximum cost may also be called the marginal cost of 
production, because the ten-cent producer is just on the margin 
of withdrawing. He neither makes nor loses. All the other 
producers — the intramarginal producers — earn a profit rep- 
resented by the difference between the cost to them and the 
selling price. The six-cent producer makes four cents on each 
yard, the seven-cent producer three cents, and so on. But the 
ten-cent producer only covers expenses. 

If we could conceive of society at a given moment, with no 
changes in population or fashion or supply of capital or tech- 
nique, this condition would be permanent. The marginal 
producer would just barely make both ends meet, but would 
earn nothing above his cost. But although society is never 
permanently in such a state, the condition may at any given 
period be said to be realized. At every season when goods 
are thrown on the market the seasonal supply may be deemed 
fixed. The cotton prints that are sold this year were made 
months ago. According to variations of demand from day to 
day the market price will change, but the oscillations during 
this particular season will move about a central point of normal 
price which, so far as the supply for this season is concerned, 



§ 105] Law of Minimum Cost. 247 

depends upon the maximum cost, that is, the cost of producing 
the most expensive increment in the actual supply. Whatever 
the daily fluctuations of market price may be, the normal price 
for this season will be ten cents a yard. At any given period, 
cost of production means maximum or most expensive cost. 

105. La'w of Minimum Cost. 

The normal supply price just discussed is, however, not the 
permanent price for longer periods. Actual business condi- 
tions are dynamic. There is a continual movement going on 
in the forces that affect supply. The cotton prints may sell 
one season at ten cents, but next season the more efficient 
producer, or perhaps some new-comer with more capital or with 
better machines or with the chance of securing cheaper labor 
or with improved facilities for marketing the product, will 
endeavor to put out an increased supply at a lower cost. This 
increase of supply will tend to depress the price, and although 
the manufacturer's percentage of profit may be smaller than it 
would have been at the old price, his aggregate profits will be 
enhanced through the greater volume of sales. 

On the other hand, his gains will be at the expense of the 
less efficient producer at the margin. In every business there 
are always some who are able just to make both ends meet. 
Their machinery is antiquated, their capital has been depleted, 
their business activity and knowledge are no longer what they 
should be, and their former profits, if there ever were any, have 
now vanished. They may continue for a time to struggle 
along, hoping against hope, and may live on their capital, being 
content to bridge over the next few years without profit ; or if 
they have invested heavily in unsalable buildings and machin- 
ery, they may deceive themselves by a fallacious system of 
bookkeeping, and through a neglect to charge up the item 
of depreciation of stock or machinery, may figure out a nomi- 
nal profit. In any case, however, the day of reckoning is sure 
to come. Sooner or later the producer will find that he is 
not making money. He will cease producing that particular 



248 Normal Value. [§ 105 

commodity, and his place will be taken by some more efficient 
producer. 

All industrial progress consists of a perpetual change at the 
top and at the bottom of the line of producers. Fresh capital 
is continually coming in, the discouraged are continually step- 
ping out. 

It is plain, then, that if by normal value we mean the value 
to which prices tend in the long run to conform, normal value 
under conditions of progress moves in the direction of cost of 
production under the most favorable, not under the least favor- 
able, conditions. It tends toward lowest cost, not highest cost. 
In the cotton industry, for instance, a new man enters the field 
who can produce prints somewhat more cheaply. While not 
able to supply the entire market, he can turn out such large 
quantities that the price will fidl, let us say, to nine cents. He 
is willing to sell at that figure, because he expects to dispose 
not only of his share of the greater sales due to lower prices, 
but also of a proportion of the goods previously sold by the 
ten-cent producer, who now drops out. Even if he could sup- 
ply the whole demand, he will not reduce the price to eight 
cents, because, although this would again increase his sales, his 
competitors — the six and seven cent producers — will also 
sell more, and he will not be able to sell enough more to com- 
pensate him for the lower price. Under such conditions the 
price will be nine cents, and, the ten-cent producer having 
fallen out, the nine-cent producer becomes the marginal man. 

On the other hand, if the new producer finds that he can 
produce his goods at a lower price and market them more 
successfully than his competitors, the price will gradually fall. 
With every decrease in price the old marginal producer dis- 
appears, and he who formerly made a profit now becomes the 
marginal producer. When a five-cent or a four-cent producer 
makes his appearance, the price may fall to six cents, and the 
nine-cent, eight-cent and seven-cent producers successively 
abandon the struggle, until the six-cent producer now becomes 
the marginal producer. 



§ io6] Law of Varying Cost. 249 

Thus it is that while the cost of production on which sea- 
sonal or short-time normal supply price depends is greatest 
or maximum cost, the cost of production which influences 
permanent normal value is lowest or minimum cost. In con- 
ditions of change the marginal or maximum cost does not fix 
the price, but is fixed by the price ; the price does not fall to 
nine cents because the nine-cent man becomes the marginal 
producer, but the nine-cent man becomes the marginal pro- 
ducer because the price falls to nine cents. Hence, while 
normal value is at any given moment at the point of maximum 
cost, it is under conditions of progress continually moving in 
the direction of minimum cost. 

106. Elasticity of Supply — The Law of Varying Cost. 

Corresponding to the elasticity of demand, there is an elas- 
ticity of supply. In some cases where no additional quantity 
can be secured on any terms the supply may be said to be 
completely inelastic. But in most cases the supply is suscep- 
tible of increase. According to the difficulties involved in 
procuring this new supply we speak of the relative elasticity of 
the supply. When an additional amount of exertion will result 
in a proportionate increase of output, that is, when double 
the labor will double the supply, we speak of the cost being 
constant. 

Constant cost, then, is not the same as uniform cost. When 
we say that a commodity is produced at uniform cost, we mean 
that all parts of the supply produced at a given time cost the 
same. This implies that there is only one producer. For, as 
we have seen, as soon as there are different producers we have 
a maximum and a minimum cost. Uniform cost implies 
monopoly. On the other hand, when we say that a commodity 
is produced at constant cost, we mean that additional quanti- 
ties will cost the same. This applies to competition and to 
monopoly alike. If it costs the monopolist ten cents to pro- 
duce every yard of cotton, no matter how large the output, the 
cost is both uniform and constant. If the ten- cent producer 



250 Normal Value. [§ 106 

competes with the six and eight cent producers, and if each can 
double his output by the apphcation of double the amount of 
capital, the cost is not uniform, but it is constant. 

In many cases the cost of production is not constant, be- 
cause the supply is less expansible or elastic. When each 
additional increment of the supply costs more than the pre- 
ceding, we speak of increasing cost or, since the returns from 
each additional application of energy grow smaller, we can 
equally well speak of diminishing returns. 

In one sense everything, as we know (§ 88), is subject to the 
law of diminishing returns. While, however, the law of dimin- 
ishing returns or increasing cost is universal in the sense that 
it applies to all economic goods after a certain point, it does 
not necessarily apply before that point has been reached. The 
"certain point" is the point of full utilization. It frequently 
happens that this point has not been reached. If we recur to 
the examples on page 213, the omnibus may run only half full; 
there may be only two trains a day when there might equally 
well be a dozen ; a farmer with a twenty-five- acre tract may 
have a family so large that he would more than double his 
produce if he had a fifty-acre farm. In the case of the omnibus 
an increase of business will not increase the expense at all ; in 
the case of the railroad more rolhng stock and employees may 
be needed, but new bridges, new roadbed, new stations and new 
general offices may not be required ; in the case of the farmer 
more seed and perhaps more implements will be used, but these 
may constitute only a minor element of cost. In all these 
cases a doubling of receipts may not be attended by a doubling 
of expense ; the expenses will increase, but not so fast as the 
income. 

Whenever the supply is more elastic, that is, whenever 
double the amount of exertion yields more than double the 
output, we are in the presence of the law of increasing returns 
or decreasing cost. When double the exertion just doubles the 
output, we have the law of constant returns or constant cost. 
Up to the point of full utilization the returns may at first grow 



§ I07] Law of Joint Cost. 251 

faster than the cost or exertion, and may then keep pace with it. 
In every business enterprise some expenses grow with every 
increase of business, but others remain the same up to a given 
point. Such expenses are called constant as opposed to varia- 
ble expenses. Wherever the investment of capital is consider- 
able, the proportion of constant to variable expenses is apt for 
a time to be large. But the time will ultimately expire. When 
the railroad traffic becomes very dense, new tracks, heavier 
bridges, larger stations must be provided, and the law of 
increasing returns loses its efficacy. Sooner or later the law of 
increasing returns will be supplanted by that of constant re- 
turns, only itself finally to give way to the fundamental law of 
diminishing returns. 

At any given period, however, an industry may be subject 
to any one of the three laws. The question whether a business 
follows the law of diminishing, constant or increasing cost is a 
question of fact depending upon the possibility of profitably 
employing more labor or capital, that is, of successfully extend- 
ing the point of intensive or extensive utilization. 

107. LaAAr of Joint Cost. 

Just as we have seen that there is a joint demand, so there 
is a joint supply. To the extent that supply depends on cost, 
we have the law of joint cost. In many cases different parts 
of the same commodity serve different uses and therefore sell 
at different prices : the staterooms in a steamer, the seats in a 
theatre, the various portions of an animal used for food, appeal 
to different classes, and thus sell at varying prices. The nor- 
mal price does not adjust itself to the cost of the particular 
part, because there is no such separate cost. It is the whole, 
not the parts, to which we can assign a cost ; and this cost is 
the joint cost. The normal price of all the parts together 
adjusts itself to the joint cost, but the price of any particular 
part may be above or below this level. 

A more important class of cases is represented by industries 
devoted primarily to the production of some one commodity, 



252 Normal Value. [§ 107 

but which have as an incidental result the creation of a by- 
product. Sometimes this by-product is only the refuse^ as 
in the case of the mash sold by the whisky distillers or the 
coke sold by the gas companies. Occasionally the by-product 
even dev^elops into the chief product. The refuse of to-day 
becomes the principal source of profit of to-morrow. There is 
nothing more fascinating in the annals of science or more im- 
portant in the progress of wealth than the story of the modern 
utilization of wastes and by-products. This story, in its appli- 
cation to the United States during the decade 1890-1900, has 
been told by Mr. Kittredge in the twelfth census. 

Whenever a business produces more than one kind of com- 
modity, we have something analogous to by-products. One of 
the greatest difficulties in modern enterprise is for the pro- 
ducer to assign to each unit or class of his output its propor- 
tionate share in the joint cost. In the case of railway charges 
this difficulty is at its maximum. In such cases the price of 
the individual product may bear little relation to its own cost, 
although the price of all the products together is fixed by 
joint cost. The railway charges more for the transport of a 
given value of silk than for that of an equal value of coal, 
although the cost is far less. Price here is fixed not by cost 
of production or cost of service, but by value of service. The 
silk is so much more expensive than coal that it can afford to 
pay a higher charge. If the same price were charged for coal 
as for silk, coal could not be transported at all, as the price 
would be prohibitive ; and as long as the charge for coal is 
higher than the mere hauling expenses, the charge for silk is 
lower than it would otherwise be (see § 237). The principle 
of value of service is only another way of stating the law of 
marginal utility, and it shows clearly that cost of production in 
itself is not the ultimate regulator of value. In the same way, 
when domestic manufacturers regularly dispose of a portion of 
their surplus output by "dumping" it abroad at prices far 
lower than at home, it does not always follow that the lower 
foreign prices make the domestic price exorbitant. For the 



§ io8] Normal Demand and Supply. 253 

continuous foreign sales at the lower price may be the chief 
means of keeping the factory going, and may thus make the 
domestic price lower than it would be if the producer had to 
charge up to his domestic goods the total expenses of a pro- 
(hiction which would otherwise be unremunerative. Cost of 
])roduction is coming more and more to mean joint cost ; the 
price of a given product may bear only a remote relation to 
its individual cost of production. 

108. Equilibrium of Normal Demand and Normal 
Supply. 

In the preceding sections we have several times spoken of 
normal value depending on cost of production. In reality it 
is only normal supply price that is directly related to cost 
of production, while normal demand price depends on the 
strength of the effective demand. It remains, then, to con- 
sider the mutual influence of normal demand and normal 
supply. 

While the existence of a demand is the fundamental cause 
of value, the influence of supply shows itself in the fact that 
the tendency of normal value is to adjust itself to the cost of 
production, as we have explained the term. A change in the 
normal demand for reproducible goods means a change in the 
normal supply ; but whether it means a change in normal 
value depends on the law of cost. If the demand for a com- 
modity increases greatly, the permanent output will be larger. 
If the industry is subject to the law of constant return, the price 
will not change, because the larger supply and the larger de- 
mand will still balance each other at the old price. But if the 
industry is subject to the law of increasing return, where a larger 
output involves a relatively smaller cost, the result will be that 
the producers will be able to throw on the market more than 
is needed, and the influence of this augmented supply will 
reduce the price, until there is now a new and permanent equi- 
librium of demand and supply at the lower price. 

Since diminution of cost of production is attended by lower 



2 54 Normal Value. [§ 109 

prices and larger output, the influence which seems to affect 
normal value is the change in cost of production. 

In truth, however, demand is a factor of at least equal im- 
portance in fixing normal as well as market value. Unless the 
producers can dispose of their enlarged output, they will 
have no inducement to continue. If the demand cannot be 
changed, the price cannot. But if the demand can be stimu- 
lated by the lower price, the supply will be increased until 
there is a permanent supply at a fixed cost to satisfy the per- 
manent demand. If the supply changes owing to an altera- 
tion in cost, there can be a permanent supply at this new cost 
only if there is a new permanent demand. In every case 
there can be a normal price only if there is an equilibrium 
between the normal demand and the normal supply. So 
that when we say that normal price is fixed by the cost of 
production, we really mean that it is fixed at the cost of 
production. Only in this sense can we speak of normal value 
depending at any given moment on maximum cost, or tending 
in the long run toward minimum cost, or being influenced in 
particular cases by joint cost. 

109. Influence of Normal Price upon Market Price. 

It is therefore inexact to say that market price depends on 
demand and supply, while normal price depends on cost of 
production, if we mean by this that the two statements are 
opposites. AU price depends on demand and supply, but in 
the case of reproducible goods the permanent equilibrium 
between demand and supply tends to adjust itself to the 
cost of production. The rapidity with which this adjust- 
ment takes place depends on the relative changes that oc- 
cur in demand and supply. If the stock of cotton prints 
produced at a cost of twenty cents a yard is large, and if the 
introduction of the newer ten-cent prints of the same quality 
is slow, the price will not at once fall to ten cents. There 
will be a tendency for the price to adjust itself to the new 



§ no] Normal and Market Price. 255 

cost, and the greater the relative supply of the new cloth, the 
more quickly will the price fall. As soon as purchasers know 
that they can get the same goods cheaper by waiting a short 
time, only those who cannot afford to wait will be willing to 
pay more ; and it is their demand which for the time prevents 
the subsidence of the price to the new cost level. When 
the new level is reached no further change takes place, the 
conditions will be static and the normal price permanent. 

If, on the other hand, the cost of cloth continuously falls 
owing to the introduction of successive improvements, the 
normal price will itself be changing. The market price will 
move in the direction of the new cost or normal price, but the 
fall in cost may be so rapid, and the influence of the old 
stocks so great, that the actual market price may not at any 
moment quite reach the normal price. There will be a per- 
petual chase, but no reaching of the goal of equivalence 
between the market and the normal price. There will be no 
permanent equilibrium, because there will be a continual 
change in the forces affecting the supply and the demand. 
Under dynamic conditions the normal price of commodi- 
ties may never emerge, but its influence is none the less 
marked 

110. Normal Monopoly Value. 

The foregoing discussion has proceeded on the assumption 
of competitive conditions. IT by monopoly we mean the usual 
case of sellers' monopoly, the difference between monopoly 
and competition lies entirely on the side of supply. Unless 
there is a change in price, permanent demand will- not ordi- 
narily change simply because competitors are supplanted by 
a monopolist. But the conditions affecting permanent supply 
are at once altered by such a transition. 

In the first place, monopoly supply price is not necessarily 
a unitary or single price. The monopolist may make great 
profits by selling different parts of the supply of the same 
commodity at different prices. The principle here, however, 



256 Normal Value. [§ no 

is precisely the same as in the case of monopoly market price, 
which has been mentioned above (p. 235). There may not 
be one normal price, but several. 

Secondly, marginal cost has no influence on price. It may 
indeed happen that the monopolist controls several factories 
which work under different advantages so that technically there 
may be differences in their expense of production. The point, 
however, is that no force exists tending to fix the price at the 
point of greatest cost. One cotton factory in the trust may 
produce prints at five cents, another at ten ; in the absence of 
competition there is no reason why the trust should sell all the 
goods at ten cents. 

If monopoly price is not influenced by marginal cost, is it 
affected by cost at all? Assuredly, but in a more indirect 
way than competitive price. Monopoly price is always at 
the point of maximum monopoly revenue. The monopolist, 
like every one else, wants to sell the greatest amount at the 
highest price ; the monopolist, however, controls the supply. 
Since increased supply ordinarily means lower price, he will 
experiment until he finds the point of greatest net returns. 
The influence of demand over which he has no control is as 
potent as in competition ; the law of substitution works here 
as there. If by reducing prices one-half he doubles his sales, 
the gross receipts will be the same as before ; if he cannot 
double his sales, the gross receipts will fall off; if he more 
than doubles them, his gross receipts will increase. Thus the 
elasticity of demand is of paramount importance. 

Since the supply, however, costs something to produce, his 
net profits will depend on the surplus of gross receipts over 
cost. This surplus will vary not only with the elasticity of de- 
mand, but also with the elasticity of supply. In other words, 
if the industry is subject to the law of constant cost, the 
maximum monopoly revenue wifl be reached at an easily ascer- 
tained price. If he charged less, he would sell more, but not 
enough more, to compensate him at the lower price for the 
total cost of the increased output ; his gross receipts would not 



§ no] Normal Monopoly Value. 



257 



rise as fast as his aggregate cost. On the other hand, if he 
charged more, the sales would fall off so quickly that the 
decrease in his gross receipts would not be offset by the lower 
aggregate cost of the entire output. 

If, however, the industry is subject to the law of increasing 
cost (diminishing returns), the maximum monopoly revenue 
will be reached at a higher price ; if it is subject to the law of 
decreasing cost (increasing returns), it will be reached at a 
lower price. Suppose that the demand is such that the 
price falls off regularly with the increase of output. Then 
according to the law of constant cost we should have a table 
like this : 



Units Sold. 


Price per 

Unit. 


Gross 
Receipts. 


Cost per 

Unit. 


Total Cost. 


Net 
Receipts. 


500 
1000 
20CO 
3000 
4000 


Cents. 
30 
~5 
20 

15 
10 


$150 
250 
4CO 
450 
400 


Cents. 
10 

10 

10 

ID 

10 


ICO 

200 
300 
400 


^100 

200 
150 



Thus the monopolist will make the largest profits by putting 
the price at 20 cents and by selling 2,000 units. But if the 
law of increasing cost applies, according to the figures in the 
fourth column, it will pay him to put the price at 25 cents and 
to sell only 1,000 units. For: 



Units Sold. 


Price per 
Unit. 


Gross 
Receipts. 


Cost per 
Unit. 


Total Cost. 


Net 
Receipts. 




Cents. 




Cents. 






500 


30 


$150 


10 


$50 


$100 


1000 


25 


250 


12 


120 


130 


2000 


20 


400 


14 


2S0 


120 


3000 


15 


450 


16 


480 


-30 


4000 


10 


400 


18 


720 


—320 



17 



258 



Normal Value. 



[^ 



no 



On the other hand, if the law of decreasing cost appHes, he 
will find it to his interest to charge only 15 cents and to sell 
3,000 units. For : 



Units Sold. 


Price per 
Unit. 


Gross 
Receipts. 


Cost per 
Unit. 


Total Cost. 


Net 
Receipts. 


500 
1000 
2000 
3000 
4000 


Cents. 
30 

25 
20 

15 
10 


$150 
250 
400 

400 


Cents. 
10 

8 

6 

4 
2 


$50 

80 

120 

120 

80 


$ICO 

170 
280 

330 

320 



In every case, as we see, there is a definite maximum mo- 
nopoly revenue. 

Monopoly price is therefore influenced by cost of produc- 
tion, but in a different way from competitive price. Whether 
it is higher than competitive price depends again on cost. 
Ordinarily it will be higher, because competitive price is cost 
price (z. e. marginal cost price), while monopoly price is above 
cost price. Where a monopoly, however, is created by former 
competitors to avoid some of the wastes of competition, the 
cost may be reduced so materially that it will be profitable for 
the monopolist to sell a largely increased supply at a lower 
price. In such a case monopoly price may be lower than 
competitive price. 

In some cases, again, monopoly price may be only very 
slightly above competitive price. It frequently happens that 
what seems to be monopoly is really subject to potential com- 
petition. As long as the monopolist is content to charge a 
price low enough to give only moderate profits, he may retain 
control of the output. But if he raises the price to an exces- 
sive point he may either tempt other producers into the field 
or lead the consumer to choose some substitute. This latent 
or potential competition is a factor to be reckoned with in all 
cases where the monopolist is not safely intrenched by some 
legal or permanent economic advantage. 



§ no] Normal Monopoly Value. 259 

Since monopoly profits depend partly on cost, the intelligent 
monopolist will strive to avail himself of the newest processes 
to reduce cost. Provided that demand is expansible he will 
seek to reduce price as long as gross receipts increase faster 
than aggregate cost ; the greater the reduction of cost per 
unit, the more probable will this result be. Thus under favor- 
able conditions monopoly price tends to fall, even though at 
any time it may be above competitive price. The price of 
oil charged by the Standard Oil Company, for instance, has on 
the whole fallen, even though the fall in price has not kept 
pace with the still greater fall in the price of the crude petro- 
leum. But where the demand is not so expansible as in the 
case of municipal street railways or the gas supply, or where 
the monopolist pursues a short-sighted policy, the gap between 
monopoly and competitive price widens. 



CHAPTER XVII. 
THE GENERAL LAW OF VALUE. 

111. References. 

J. B. Clark, Dish-ibution of Wealth (1899), chs. xvii, xxv, xxvi ; F. A. 
Fetter, Principles {1904), ch. xliii; A. Marshall, Principles (1898), bk. v, 
ch. xiv; F. v. Wieser, Natural Value (1893), bk. iii, ch. viii ; H. R. 
Seager, Introduction (1904), chs. xv, xvi ; E. S. Meade, Trust Finance 
(1903), chs. xvi, xvii; E. R. A. Seligman, Shifting and Incidence of Tax- 
ation, (1889), bk. ii, ch. iv, part 2, ch. viii, and Social Aspects of Economic 
La7v, Presidential Address in Am. Econ. Assoc. Publications, 3d series, 
no. I (1904) ; H. J. Davenport, Value and Distribution (1908), ch. xxvii. 

112. Value and Cost of Pjoduotion. 

In the preceding chapter we have dealt with the value of 
reproducible goods. Value, however, attaches also to non- 
reproducible concrete goods as well as to relations and privi- 
leges, to human services and to a fund of capital. How far is 
the value of these related to the cost of production ? 

It is clear that in the case of concrete non-reproducible 
goods value stands in no assignable relation to cost of produc- 
tion. The most prominent example is land. Land is not the 
result of production. To be sure, if a piece of virgin land lies 
idle and a town springs up around it, it will soon acquire an 
increased value ; yet neither the land nor any of its qualities 
has been produced by human agency. Efforts may indeed be 
expended on the soil, and in that sense some of its qualities 
might be deemed to be in part the result of production, but 
even here its value stands in no relation to the efforts of the 
individual. Again, take a piece of old sculpture or furniture. 
It cannot be reproduced ; it may sell for a thousand times the 
original cost. Finally, consider two equally good pictures by a 

260 



i 112] Cost of Production. 261 

great painter but finished, the one before and the other after 
his attainment of renown. The difference in their value can- 
not be explained by any difference m cost of production. In 
short, the value of concrete non-reproducible goods is neither 
fixed nor measured by cost of production, either because they 
have never been produced at all by human agency, or because 
they cannot be reproduced, or because there is no assignable 
relation between the effort of the producer and the present 
price of the product. Whether these goods be rented or sold, 
their rental as well as their capital value does not depend on 
cost of production. 

The value of that class of economic goods known as rela- 
tions and privileges likewise stands in no direct relation to 
cost of production. Privileges and relations vary as much in 
character and value as any other kind of economic goods. 
They may represent only a single use, like a put or call on 
the stock exchange, or a continuous series of uses, like a per- 
petual franchise of a corporation. When they are capitalized, 
their value, like that of all other goods, is affected by the dura- 
bility and certainty of enjoyment. A permanent franchise of 
a railway differs from the limited privilege of a patent ; but in 
the one case as in the other the durability and certainty of the 
use are independent of the personality of the possessor. With 
the good-will of a business, however, the continuance of profit- 
able relations is often so largely conditioned by the business 
capacity of the temporary possessor that there is less difference 
between capital and rental value than in the case of a more 
permanent or a perpetual privilege. In some instances the 
trade-mark is the chief asset of a business. The president of 
the American Chicle Company recently testified that the con- 
sumers of chewing gum had become so accustomed to certain 
well-advertised brands that the company was able to pay divi- 
dends on a capitalization nine times the amount of tangible 
assets. Over eighty-eight per cent of the value of the property 
was due to the trade-mark.^ 

1 U. S. Industrial Commission, Final Report, § 612, 



262 General Law of Value. [§ 113 

Whether privileges are durable or ephemeral, it is clear that 
their value — whether rental or capital value — does not de- 
pend upon any cost of production. The good-will of a 
business may indeed in one sense be deemed the result of 
laborious exertion, but the value of the good-will does not 
stand in any assignable relation to the exertion. It may exist 
to-day and disappear to-morrow, without any visible change 
in the proprietor. Most franchises and privileges, moreover, 
are not the result of any one's exertion ; they are the conse- 
quences of intricate social relations, and consist of the opportu- 
nity of turning these relations to profit. Take even so simple a 
case as that of a news-stand in a city. The owner often rents 
out the privilege of serving newspapers to a list of customers, 
and when the stand is sold outright the chief constituent in 
the price is the value of the " route," — the capitalization of 
the income from the privilege of serving customers. Yet this 
route may have cost the original owner nothing to acquire ; 
as the street was built up, the route increased in value, as it 
were automatically. So also the franchise of a railway, the 
circulation of a country newspaper, the selling value of a gas 
or water company grows with the mere process of time and the 
increase of population. The social relations which form the 
basis of their activity are not produced by any individual; 
the privileges of utilizing these relations have no cost of pro- 
duction. Yet they have a very decided value. 

It is not necessary to illustrate further. All these things — 
relations, privileges and non-reproducible concrete goods — 
are daily bought and sold in the market-place, and yet their 
value does not directly depend on their cost of production and 
cannot be measured by it. Since cost of production cannot be 
the general law of value, what is that ultimate law ? 

113. Value and EfEciency. 

We have learned that value is at bottom the expression of 
marginal utility. It follows that all prices must be studied 
from the point of view of marginal utility, that is, of the power 



§ 113] Value and Efficiency. 263 

of marginal increments of supply to satisfy the marginal in- 
crements of demand. This is only another way of stating 
that the fundamental explanation of value is marginal effi- 
ciency, or the capacity of marginal units to satisfy marginal 
wants. 

(i) In the case of concrete non-reproducible goods this is 
patent. When a farmer hires a piece of land, the rent which 
he pays depends on the produce of that special grade of land 
as compared with others. When a speculative builder secures 
a site, the price of the lot is fixed by its capacity, from the 
point of view of eligibility, to satisfy the wants of a particular 
class of tenants. Whether he pays a capitalized purchase 
price or an annual rent, as in England and some parts of 
America, is immaterial. Again, the value of a painting, old 
or new, is regulated by its capacity to appeal to the taste of a 
particular class of amateurs, that is, by its marginal efficiency 
in contributing to the satisfaction of certain wants. Cost of 
production, as we have learned, plays no direct role in the 
determination of value of this entire class of cases. Not cost, 
but efficiency, is the explanation. 

(2) With that class of economic goods that we have called 
relations or privileges the situation is analogous. The rental 
of the news-stand, the franchise of the gas company, a patent 
or copyright, a new brand of goods or a trade-mark, — the 
value of all such intangible relations depends on the extent to 
which they contribute to the earnings of the business. Their 
value is conditioned by the marginal efficiency of the services 
which they render. The cost may have been zero ; — not 
cost, but efficiency, affords the clue. 

(3) The great mass of concrete reproducible goods has 
been discussed in the preceding chapter. Here indeed cost 
of production seems to be of commanding importance. As 
we have learned, however, it is not so much that prices of 
such goods are fixed by the cost of production as that they 
are fixed at the cost of production. The value of all produc- 
tion goods is derived from the value of their products, — the 



264 General Law of Value. [§ 113 

consumption goods ; the value of the raw material is derived 
from the value of the finished product. The price of pig iron 
depends on the price of the nails, billets and all other iron 
products into which pig iron enters as a constituent. If the 
demand for these products should diminish, the price of pig 
iron would fall, those who produced at a higher cost would 
stop producing, and the new (marginal) cost of production 
would adjust itself to the new price. There is an abundance 
of silver below the surface that is not mined because it will 
not pay ; if the marginal efficiency or value of silver should 
rise, these morQ expensive grades would at once be marketed 
and the new marginal cost of production would adjust itself to 
the price. The price would not rise because the cost in- 
creased ; but the higher price would be fixed at the higher 
cost because that would now be the new point of marginal 
efficiency. 

(4) We come, finally, to the value of human services and of 
the fund of capital. Wages and interest are of such signal 
importance in the distribution of the social income that their 
fuller discussion will be reserved until later. It may, however, 
be said provisionally that they, like everything else, derive 
their value from the marginal increments of the services which 
they render, that is, from their marginal efficiency. To the 
extent that labor is productively employed the rate of wages in 
each grade of labor must in general tend to equal the mar- 
ginal efficiency of the labor, that is, its contribution to the 
product at the margin of employment. In the same way the 
rate of interest will tend to equal the marginal efficiency of 
capital, that is, the actual contribution of the marginal incre- 
ment of capital employed. How these marginal contributions 
of both labor and capital are to be measured, and how the 
changes of actual life move the margin of this efficiency up or 
down, remain to be considered later. 

Labor and capital, however, are susceptible of increase. 
Will they then not increase up to the point of continuous cost 
of reproduction, and can it not be said that their value is fixed 



§ 113] Value and Efficiency. 265 

by the cost of production? In the case of labor, if by cost of 
production we mean the cost of the physical reproduction of 
the laborers, we encounter the difficulty that human beings are 
not reproduced for economic reasons. But even if we restrict 
our attention to the economic causes of the growth of popula- 
tion, and aver that the future supply of laborers depends on the 
cost of reproduction, that is, of bringing them into the world 
and nourishing them until they become self-supporting, the 
obvious rejoinder is that this expense is a result rather than a 
cause, and that what the laborer can afford to spend on his 
family will depend upon the wages which he receives. It is 
as in the case of reproducible commodities, where value is 
fixed at the cost of production, but not by the cost of produc- 
tion. The contribution or efficiency is the positive cause ; the 
cost of production adjusts itself to this. 

In the same way, to speak of the cost of production of the 
mass of capital is ambiguous. Capital as a fund or embodi- 
ment of value has in one sense no assignable cost. To ask 
what is the cost of production of a thousand dollars is un- 
meaning. The thousand dollars may represent the present 
value of no longer fashionable dress-goods which originally 
cost fifty thousand dollars, or it may represent the value of a 
newly discovered petroleum well which cost the finder nothing. 
In another sense, however, capital has a cost. The mass of 
capital consists of individual pieces of capital, and the increase 
of capital depends ultimately, as we shall see, on the readiness 
to forego present gratifications for future satisfactions. This 
readiness involves a delay and generally therefore a cost ; and 
interest, as we shall learn, may be explained in terms of this 
marginal cost. But here again the cost would not be under- 
gone if it were not for the services to be enjoyed. So that in 
the end it is the efficiency of the service which is the positive 
factor. The cost adjusts itself to the service. 

Thus the great law of value is marginal efficiency. When 
the economic good is used for productive purposes, marginal 
efficiency becomes marginal productivity ; but when it is used 



266 General Law of Value. [§ 114 

for purposes of consumption, we cannot well speak of pro- 
ductivity. Not only in the case of wages and interest, but in 
the case of economic relations and of concrete commodities, 
reproducible as well as non-reproducible, prices depend on 
marginal efficiency. In all economic goods except labor, we 
have to deal with capital values ; in all economic goods except 
the fund of capital we have to deal with rental values : the 
rental as well as the capital values of all classes of goods de- 
pend on their marginal efficiency. In some cases marginal 
efficiency means marginal productivity ; within this class again 
marginal productivity is in some cases equivalent to the cost 
of production. Cost of production is thus only a partial, and 
even then a proximate, explanation of value ; marginal effi- 
ciency is the universal and the ultimate explanation. 

114. Efficiency and Capitalization. 

Because of this frequent lack of correspondence between 
value and cost, the problem of the valuation of complex goods 
often becomes one of extreme difficulty. Where such a good 
regularly changes hands on the competitive market, the diffi- 
culty is obviated by the automatic action of the forces of 
demand and supply ; its earning capacity or marginal service- 
ableness can be gauged with almost unerring accuracy, and 
there will be a fixed rate of capitalization depending, as we 
have learned, on the durability and certainty of income. A 
good example of this equihbration between income and capital 
value is seen on the stock exchange, where the slightest alter- 
ation in present or prospective earnings is at once reflected in 
a fluctuation of the quotations. Even here, however, we must 
remember that the stock exchange quotes only market values ; 
and that these market values are liable to be affected by all 
kinds of speculative influences not connected with real earn- 
ing capacity. 

In actual life we have to deal with all possible combinations 
of economic goods. The value of a simple reproducible com- 
modity may indeed be explained by or referred to the cost of 



§ 115] Efficiency and Capitalization. 267 

production, because at any given time this cost is adjusted to 
the price ; but the value of a complex product or business may 
bear only a slight relation to cost. The value of a livery 
stable differs somewhat from the value of reproducing the 
horses, carriages, harnesses and buildings ; the value of a huge 
steel plant differs considerably from the cost of the land, the 
buildings and the machinery ; the value of a railroad has still 
less relation to its cost of production or of reproduction. In 
such cases we have to do not only with reproducible products, 
like the concrete articles of steel or the acts of transportation, 
but with non-reproducible commodities and relations, like the 
good-will of the firm, the favorable location of the railroad, 
the abihty of the managers, and all the other factors which 
cannot be duplicated, but which enhance the profitableness 
and therefore the value of the business. Their selling value is 
a capitalization of their estimated future uses. 

The problem of capitalization in its relation to efficiency 
has become important in three fields, — that of taxation, that 
of regulation and that of investment. To each of these we 
must now turn our attention. 

115. Valuation and Taxation. 

In taxation the problem presents itself in two forms. The 
first arises in those countries which still retain the property 
tax. The difficulty can be illustrated by the taxation of cor- 
porations. In Europe corporations are assessed on their 
income, which is ascertained according to fixed rules. In 
America corporations are, for reasons already mentioned 
(p. 15), usually assessed on their capital value. How, now, is 
this to be measured ? The corporate securities are often not 
dealt in on the stock exchange, and even when there are such 
dealings, the daily prices may be affected by speculative causes. 
The cost of production is of slight assistance, because it can 
manifestly apply only to the concrete tangible property, and is 
even there inadequate. It is for this reason that the valuation 
of the corporate franchise, as the chief intangible element, has 



268 General Law of Value. [§ 115 

become such a burning question in the United States. It is 
plain, however, from the foregoing discussion, that no final 
solution of the problem is possil;)le until property assessments 
are brought into a definite relation with earning capacity. 
When commodities frequently change hands, as is the case 
to-day with the mass of concrete goods, real or personal, 
property is a simpler basis of assessment than income, because 
the market influences automatically capitalize the income. 
But when sales are infrequent, as with so many modern cor- 
porations, income or rental value is the better basis, and the 
so-called property assessments must ultimately adjust them- 
selves to the earning capacity. The practical difficulty con- 
nected with the ascertainment of net earnings has led many 
States to adopt the system of gross earnings taxation. This is, 
however, a rough device, which fails to secure justice as among 
the members of each class ; corporate gross earnings tell us as 
little about relative net earnings as the mere size of a man's 
business about his profits. It is significant that in the newest 
attempts to fix the property valuations of railroads, as in Michi- 
gan, the assessors after computing the selling value of the tangible 
property estimate the value of the intangible property by 
capitalizing a certain portion of the income at a given rate. 
Taxable value is made to depend ultimately on earning capacity, 
— that is, on rnarginal efficiency. 

The other phase of the problem is of broader application. 
The well-nigh universal source of state and local revenue in 
America is the general property tax. Ability to pay is deemed 
to be the fundamental canon of taxation, and a man's abihty 
is measured by his property. Owing, however, to the growing 
difficulty of ascertaining all the items of property, certain classes 
are reached with less accuracy than others, and the tax be- 
comes virtually a partial property tax. From this inequality 
of taxation flow two important consequences. In the first 
place we have the phenomenon of diffusion of taxation. Where 
a particular class of property is singled out, the tax will often 
be shifted from the producer to the consumer, or from the 



§ 115] Valuation and Taxation. 269 

vendor to the purchaser. If a special tax, for instance, is levied 
on leather, and the conditions of the trade are such that the 
marginal leather dealer can still remain in business, the tax 
will be added to the price that the shoemaker has to pay ; and 
under similar conditions the shoemaker will increase the price 
of shoes to the consumer. The tax is shifted from one class to 
another until it is diffused throughout the community. If a 
special tax is levied on houses, and population nevertheless 
continues to increase, the tax will be shifted from the owner 
to the tenant, and if the tenant happen to employ the premises 
for business purposes, the tax will be added to the price of 
the goods displayed for sale. Furthermore, if these goods 
are utilized as the materials of some new production, the pro- 
cess will repeat itself, until the final consumer is reached. 
If a tax is levied on real estate mortgages, the rate of interest 
will rise by at least the amount of the tax, and the burden will 
be borne, not, as is often assumed, by the one who lends, but 
by the one who borrows ; and if the borrower happens to be 
a housebuilder, it will be further shifted to the purchaser and 
again to the tenant, with ulterior consequences analogous to 
those just described. Through the process of shifting, taxation 
of the property often turns out to be different from taxation of 
the property owner. 

On the other hand, when, instead of dealing with perish- 
able things like leather or houses, or with a mere right to a 
sum of money like a mortgage, we deal with more permanent 
things, like a piece of land or the fund of capital itself, the 
influence of capitalization makes itself apparent. If a tax of 
one per cent is imposed on a five per cent hundred-dollar 
bond selling at par, the net proceeds to the new purchaser will 
be only four dollars, and the price of the bond will fall to 
eighty dollars, — four dollars bearing the same proportion to 
eighty dollars as five to a hundred dollars. There is no reason 
why people should content themselves with four per cent 
earnings when the general rate of interest in the untaxed field 
is five per cent. In the same way, when a special tax is levied 



270 General Law of Value. [§ 115 

on land, its value will be reduced by the capitalization of the 
tax. The important consideration in each case is the net 
income, or net rental; and when this is curtailed by the 
imposition of a tax, the selling value will be reduced in pro- 
portion. Since the selling value is the capitalization of the 
rental value, the dimmution in the selling price is equivalent 
to a capitalization of the tax. When a new purchaser buys 
the bond or the land, he discounts future taxes of the same 
rate by paying so much less for the property ; in other words, 
he buys himself free of the tax. Just as the tax in the pre- 
ceding case was shifted, so now the tax is absorbed, — absorbed 
into a lower selling price. 

The far-reaching consequence is this : when classes of prop- 
erty are taxed, the processes of diffusion and of absorption 
often result in what may be termed the elision or final disap- 
pearance of the tax. Under the conditions of modern busi- 
ness enterprise, when people part with their property the tax 
tends finally to disappear as a permanent burden on the class 
upon which it is sought to be imposed. It is not necessary, 
therefore, in order to secure justice in taxation, that all individ- 
uals or every item of property be taxed. Within each class of 
property holders every one indeed must be assessed ; but as 
between the classes of property economic forces will bring 
about a readjustment. The process is often a painful one, 
and in order to injure the present owners as little as possible 
great care must be observed in altering existing methods. 
But the ideal of imposing taxes on property, rather than upon 
individual property owners, must be constantly kept in mind. 
The attempt in the United States to assess every person upon 
all his property creates gross injustice, because by our hit-or- 
miss system some individuals in a given class are assessed and 
some escape. Those that escape are generally the wealthy ; 
those that are reached are for the most part the ones who 
cannot afford to pay. The general property tax practically 
results in a travesty of justice. When we abandon the imprac- 
ticable attempt to tax all property owners alike, and when, 



§ ii6] Valuation and Regulation. 271 

realizing that taxation like value itself is a social phenomenon, 
we learn to tax some kinds of property rather than all kinds 
of individuals, we shall have made a great stride forward in 
practical as well as theoretical justice. It is a process which 
is now slowly going on in the more advanced industrial com- 
munities of America. Consciously or unconsciously, it rests 
upon the conviction that capital or property values depend in 
last instance on marginal efficiency or net earnings. 

116. Valuation and Regulation. 

Another phase of the problem is seen in the difficulty con- 
nected with the official regulation of rates charged by railroad, 
gas or water companies. Where such businesses tend to be- 
come monopolies the legislator seeks to protect the consumer 
from exorbitant charges by fixing maximum rates. In justice, 
however, the criterion of what is fair to the consumer must bo 
affected by what is fair to the producer, for the producer is 
also entitled to a fair return on his capital. The whole prob- 
lem thus hinges on the question : what is the relation of the 
actual capital value of the business to the invested capital? 
Is the actual value the par value of the securities? Manifestly 
not, because the stock may have been watered to such an ex- 
tent that its actual value is only a fraction of the par value. Is 
it the market value of the securities? Not always. For the 
market value of the bonds depends not only on the rate of 
interest, but also on the period for which they have to run. If 
a four per cent bond sells at par, a six per cent bond of the 
same corporation and of the same security would normally sell 
around 150. But if the four per cent security is a long-time 
bond, and the six per cent a short-time bond, the difference 
will be far less. Furthermore, even if they are both fifty 
year bonds but emitted at different periods, and if the six per 
cent bond matures in a few years, the premium will rapidly de- 
cline with each ensuing year until it finally disappears. The 
market value of the bonds hence depends largely upon the 
conditions of repayment, and is to this extent divorced from 



272 General Law of Value. [§ 116 

the value of the corporate property as such. Moreover, if we 
take stocks instead of bonds, we find that the value of the cor- 
porate property cannot be strictly measured by the market 
value of the shares, because this market value is subject to 
violent oscillations on the stock exchange. The market value 
of the shares of the Third Avenue Street Railway Company in 
New York fluctuated a few years ago over one hundred per 
cent in the same year. On what basis could the real value 
have been computed? 

Finally it may be asked : is the actual capital value of the 
corporation to be measured by the cost of production or of re- 
production (or, as it is sometimes termed, the cost of replace- 
ment) ? Here, again, the answer is, not entirely. For this 
method would take no account of the franchises, acquired re- 
lations and general business conditions which have developed, 
and for the creation of which the corporation may or may not 
be responsible. A railway running through a frontier com- 
munity may cost in stretches as little as fifteen thousand dol- 
lars a mile to build ; after the lapse of twenty years, the cost 
of reproduction as measured by double tracking, better road- 
bed, new stations, bridges, equipment and increased value of 
the land may be perhaps thirty thousand dollars a mile. Yet 
a capitalization of the actual earning capacity might result in 
at least double that sum. To declare the entire difference to 
be " water," and to adjust rates so that the old stockholder 
should not profit by the building up of the country, or so that the 
new purchaser who has invested in good faith should have his 
income cut in half, would manifestly be unjust. A corporation, 
like an individual, is entitled to participate in the advantages of 
general prosperity. 

The Supreme Court of the United States has recognized the 
truth that not one, but all of these factors must be taken into 
consideration.^ The ultimate test of fair capital value depends 

1 Smythe v. Ames, 169 U. S. 466 (1898). " In estimating the value of a 
railroad, the following points must be considered : The original cost of 
construction, the amount expended in permanent improvement, the 



§ 117] Valuation and Investment. 273 

on a comparison of the earnings of the enterprise in question 
with those of well- managed and reputedly not overcapitalized 
undertakings of a similar character. 

117. Valuation and Investment. 

The third difficulty connected with valuation and capitaliza- 
tion is seen in the flotation of securities at the time of the organi- 
zation or reorganization of great business enterprises. In former 
years the chief example was that of railroads. While the early, 
small railroads were largely built on the proceeds of money 
actually invested by the shareholders, it was not long before 
the doubtful success of the more elaborate enter'jDrises in newer 
sections led to the issue of mortgage bonds, often below par, 
while the stock was sold at an insignificant price or even pre- 
sented to the shareholders, in order to make a better market 
for the bonds. In the same way, when railways were amalga- 
mated or reorganized, the issue of new stock often exceeded the 
aggregate of the old, the excess representing the capitalization 
of the increased earnings which it was expected would result 
from the combination. In these two cases the issue of stock 
might be economically justifiable either as the sole practicable 
method of securing capital for a new and doubtful enterprise, 
or as the best means of reducing prospective earnings to a 
present basis. In the one case the stock presented or sold at 
a discount represents the present worth of an insecure and 
speculative future ; in the other case the stock is the capitaliza- 
tion of a future income, just as the issue of securities for doub- 
ling the track is legitimate only when the traffic is expected 
to be so heavy as to increase the income at least to the point 
of earning a return on the new capital. In all such cases we 
cannot properly speak of overcapitalization or stock-watering. 

Unfortunately, however, there is always the danger that the 
anticipations may be mistaken, or that the calculations may 

amount and market value of the bonds and stock, the present as com- 
pared with the original cost of construction, the probable earning capa- 
city of the property, and the sum required to meet operating expenses." 

18 



274 General Law of Value. [§117 

be designedly falsified in order to enable the manipulators to 
dispose of stock whose worthlessness they suspect or know. 
Finally, when it seems desirable, for the purpose of evading 
legislative restrictions or of placating public opinion, to keep 
down the dividend rate, the amount of stock may be augmented 
by the device of scrip dividends or an increase of the nominal 
amount of the securities in the hands of the shareholders. In 
all such cases we have to deal with stock-watering pure and 
simple, — that is, the creation of additional securities which do 
not represent additional earning capacity. 

Since the formation of the modern industrial combinations 
known as trusts, this aspect of capitalization has assumed still 
greater importance. The chief danger of the situation con- 
sists in the facility afforded to unscrupulous promoters to 
finance the organization of the combination in such a way as 
to deceive the investors and to reserve the greatest profit for 
themselves, by selling the inflated securities at prices wholly 
unjustified by prospective earnings. The mere fact that the 
united capital of a combination exceeds the aggregate capital 
of the constituent companies does not prove the existence of 
overcapitalization ; for if the new enterprise is honestly financed 
and well managed, the very fact of union may so enhance the 
earning capacity of the whole as to justify this capitalized antici- 
pation of estimated profits. The distinction between economic 
and uneconomic finance or between actual value and water in 
the investment of capital is not only the distinction between 
honesty and dishonesty but between intelligence and stupidity. 
While stupidity will always avenge itself on the stupid, the 
burden of dishonesty is likely to be borne by the innocent 
victim. When the loophole of competition is left open, the 
victim is not the consumer but the unwary investor ; when 
competition is stifled, the loss may fall on either or both. 
The modern demand that government should at least insure 
publicity of accounts and a reasonable correspondence between 
the prospectus and the actual facts in organizing vast enter- 
prises is a natural result of the dangers of overcapitalization. 



Book II. 
Value and Production. 



CHAPTER XVIII. 
CHARACTER AND FACTORS OF PRODUCTION. 

118. References. 

A. Marshall, Principles {1907), bk. iv, ch. i; W. Smart, Distribution of 
Income { 1899), ^^- i> ^^- ^ > F. A. Fetter, Principles (1904), ch. xxviii ; J. S. 
Nicholson, Principles (1893-1901), bk. i, ch. ii ; J. A. Hobson, Economics 
of Distribution (1900), ch. vi; H. Sidgvvick, Principles (1883), bk. i, 
chs. i, iv; F. A. Walker, Political Economy (1888), part 2, ch. iv. 

119. Production : Its Meaning and Relation to Consumption. 

All wealth may be regarded from the point of view of the 
producer or of the consumer. Commodities in the hands of 
the consumer and destined to immediate consumption are 
sometimes called consumers' goods, while those forms of 
wealth reserved for the purpose of increasing the stock of 
consumable commodities are called producers' goods. Be- 
cause the latter serve as instruments of production, they are 
sometimes called instrumental goods. 

Production and consumption clearly refer only to utilities. 
Man can create nothing material ; he can only impart motion 
to particles of matter and so rearrange them that in their new 
form they will gratify some desire. So also he can destroy 
nothing material, for matter is indestructible ; he can only so 
rearrange the position of the particles as to put an end to 

275 



276 Production. [§ 119 

their utility in that particular form. Production and consump- 
tion thus mean the creation and destruction, not of matter, 
but of utilities through the movement of matter. 

From a certain point of view production and consumption 
are two sides of the same thing. All wealth is sooner or later 
destroyed in the sense that the utilities embodied in the 
particular commodity finally come to an end. Every new 
arrangement of matter by man ultimately involves an act of 
consumption, partial or complete. We cannot produce any- 
thing without consuming something, — either commodities or 
energy, which is itself in last resort maintained by commodi- 
ties. We can make steam only by using coal ; we can produce 
goods only by wearing out the tool or machine. Not only 
does production involve consumption, but consumption might 
be said to involve production. Production is the creation of 
utilities. Commodities are consumed because they satisfy 
some want, and in satisfying this want they impart utility. So 
that all consumption short of wanton or accidental destruction 
would seem to imply production, because it indirectly yields 
utilities. Consumption would then involve production, just as 
production involves consumption. 

The distinction, however, is none the less real, even though 
difficult to draw in special cases. The criterion of production 
is not the imparting of a utility, but the creation of a new 
utility. It is only when an action brings about an addition to 
the existing sum of utilities, when, in other words, there is a 
resulting surplus of utility, that we have an act of production. 
When a railroad company buys coal and converts it into loco- 
motive power, there is an act of production, because, notwith- 
standing the consumption of the coal, the utilities afforded by 
the steam replace those afforded by the coal together with an 
addition. There is more wealth than before. On the other 
hand, the food which a man consumes, although it serves to 
keep up liis strength, imparts to him certain personal quali- 
ties which, as we know, are not wealth. They may help him 
to produce wealth in the future, but do not in themselves 



§ 119] Relation to Consumption. 277 

constitute wealth. The consumption of coal by an engine 
and of food by a laborer are therefore not on a par ; the one 
is an act of production, the other an act of consumption. In 
the one man produces wealth ; in the other wealth produces 
man. Production and consumption are as opposed as wealth 
and man. 

Since wealth and man are mutually interdependent, produc- 
tion and consumption are closely related. In a well-ordered 
community the object of consumption is more production of 
wealth and ultimate welfare. Consumption, however, does 
not necessarily lead to this result. A glutton who wastes his 
life in riotous living decreases his power of serving others. 
Thus, while consumption may be productive in the sense that 
it creates the conditions of a future production, consumption 
differs from production. Wise consumption indeed leads to 
more production : only in this sense are they two aspects of 
the same thing. The whole economic process is a flow of 
utilities from nature to man, and back from man to nature. 

It is important to remember, moreover, that the utilities 
which constitute wealth are not necessarily embodied in tan- 
gible objects. Production is not limited to the creation of 
physical commodities. The older economists maintained that 
the labor of servants, actors and the professional classes in 
general was unproductive, because not incorporated in visible . 
objects. So other writers, like Carey, have urged that the 
trader is unproductive ; and still others, like the Physiocrats, 
have contended that only the farmer is really productive. To 
those who understand that human wants are satisfied by utili- 
ties, irrespective of the source whence they flow, it is clear 
that all labor which engenders such utilities is productive. 
Labor is unproductive only when its efforts are wasted. If I 
write a book which is read, or make a table which is used, my 
labor is productive ; if the book is a failure, or the table use- 
less, my labor is unproductive. The trader, the lawyer, the 
doctor, the artist, are no less productive than the workman, 
the farmer or the manufacturer, provided they accomplish 



278 Production. [§ 120 

something that society wants. The test is the creation of 
new utilities or values. 

The utilities of which we speak are, again, not necessarily 
direct utilities. The making of electric lights is the creation of 
direct utilities ; the erection of a successful school devoted to 
the study of electricity is the creation of indirect utilities, 
because it will ultimately result in better and cheaper lights. 
In the one case we are producing commodities, in the other 
productive forces ; in both cases we are contributing to the 
production of wealth. In the same way the sums expended by 
a government for its army and navy may be productive in the 
highest sense if, as sometimes happens, they really contribute 
toward the protection or furtherance of the national industry 
or of the national existence which makes industry possible. If 
they do not do this, they are unproductive, but only in the 
sense that any unnecessary or wasted effort is unproductive. 
Intangible products, like culture and taste, are often extremely 
important to individual and state alike, and when they rest on 
a broad basis of tangible wealth they are the distinguishing 
mark of a high civilization. 

120. Kinds of Production. 

Production of wealth thus means the creation of new utili- 
ties. The utilities that can be added to things are of three 
kinds, — material, place and time utilities. A material utility ^ 
can be created by an alteration in any property of matter ; a 
change in the form, shape, weight, color, taste, smell or any 
other quality of a thing which increases its capacity to satisfy 
human wants is the creation of a new material utility. Utility 
can, however, also be enhanced by a change of place. A thing 
in one place may be worth more than in another. If the wheat 
were allowed to remain on the Western plains, its utility would 
be greatly circumscribed ; instead of satisfying the wants of 
millions, it would be consumed only by thousands. Finally, 

1 Some writers speak of this as a form utility. It is clear, however, 
that form is not the only quality susceptible of change. 



§ i2o] Kinds of Production. 279 

utilities can be augmented by a mere cliange in time. The 
alteration may take place in the supply : certain kinds of wine, 
musical instruments and similar products improve in quality 
through the mere lapse of time ; forests, flocks and the like 
increase in quantity. More frequently, however, the alteration 
occurs in the demand : things may be more useful at one period 
than at another. The efforts expended in holding the com- 
modity until it can be of the most effective service involve the 
creation of time utilities. 

All wants are satisfied, if at all, at a given time and place. 
The creation of time and place utilities is as truly productive 
of wealth as the creation of elementary material utilities. In each 
case we enhance the capacity to gratify desires. Trade and 
transportation, which deal with place utilities, as well as specula- 
tion and insurance, which deal with time utilities, are no less pro- 
ductive than the activity expended in creating material utilities. 
It is for this reason that the subject of exchange is properly to 
be regarded as a part of production. It is for the same reason 
that it is impossible to classify different kinds of activity as in 
themselves more or less productive or non-productive. The 
causes which condition the law of comparative costs vary from 
time to time and from place to place. Where land is cheap, 
agriculture may be more productive than industry ; where geo- 
graphical conditions are favorable, commerce may be more 
productive than either. To raise oranges in the Arizona desert 
would be as unproductive as to put a steel plant in the wheat- 
fields of Kansas ; yet when the Arizona desert is made to 
bloom by irrigation, or when Kansas becomes the home of a 
teeming population, oranges and steel may become the most 
productive of enterprises. The same considerations apply to 
the productivity of efforts embodied in immaterial wealth. For 
Oklahoma to build a magnificent art gallery would be clearly 
wasteful ; for New York to spend large sums on music and art 
may be highly productive, even regarded from the narrow point 
of view of increasing the capacity of the artisan to create more 
artistic and therefore more valuable products. A high-priced 



28o Production. [§ 



121 



school-teacher would be as unproductive at the country cross- 
roads as a piano factory in Alaska. Productivity depends on 
the ratio of efforts to needs ; with changing needs the same 
efforts will mean an altered productivity. 

121. Factors of Production. 

Since the foundations of economic life are nature and man, 
the primary factors of production must be natural forces and 
human effort. Sometimes natural forces alone suffice, — as in 
the case of the spontaneous increase of a herd of cattle ; 
sometimes human effort sufifices, as in the case of the rendering 
of a personal service ; ordinarily production involves the co- 
operation of the two. This is sometimes expressed by the 
statement that the factors of production are labor and land, — 
a not entirely accurate statement, because land is only one of 
the natural elements that come into consideration. Water, 
light, heat, electricity, moisture and the like also play a role in 
production, and frequently constitute economic goods with a 
definite exchange value. Again, since the application of labor 
to natural elements results in material objects, which are then 
further utilized in production, these are often spoken of as 
capital, and the factors of production are declared to be land, 
labor and capital. Capital would then be differentiated from 
land in that capital is itself an artificial product, while land in 
the wider sense is a gift of nature. 

The question whether land should be sharply separated from 
capital maybe left for later consideration (§ 132). It may, 
however, be stated here that the controversy is largely one 
of words, depending on the sense in which capital is used. If 
by capital we mean a concrete commodity, the joint product 
of labor and nature, land is to be differentiated from capital. 
If, on the other hand, by capital we mean wealth as a fund, 
land is a part of capital, since it has a capital value. Even, 
however, if we consider land as a part of capital, it is so im- 
portant a part that it may for many purposes be put in a 
category by itself. 



§ i2i] Factors of Production. 281 

Again, since the labor of directing or managing enterprises 
has become so significant, we might distinguish between labor 
in general and the skill or ability to conduct a business. The 
factors of production would then be land, labor, capital and 
management or enterprise. This classification, however, is not 
entirely free from objection. If a shoemaker works for another, 
his activity would be called labor ; if he works for himself, it 
would be called enterprise. If a factory owner manages his 
own plant, it would be enterprise ; if he sells it to a trust and 
assumes the management as a paid official, the same activity 
is called labor. Manifestly this overlooks the fact that there 
are all kinds or gradations of labor, from ordinary unskilled 
work to the exercise of the highest business talent. It is clear, 
from the examples just given, that the distinction is impor- 
tant rather from the point of view of distribution than from 
that of production. If the income from labor is a stipu- 
lated one, it is wages, wli ether it applies to a day laborer or 
a railway president ; if the income is a contingent one, it is 
profits. If a man uses his own unaided labor, he can earn 
wages ; if he combines his labor with capital in a business en- 
terprise or if he employs other people's labor, he undergoes 
risks and his income is uncertain. The hired or salaried man 
always gets a part of the product, the independent entrepreneur 
may lose money instead of making it. The law of profits is 
different, as we shall see, from the law of wages. From the 
point of view of production, however, enterprise is a species 
of labor. 

Finally, it must not be forgotten that in civilized society 
production is carried on amid an environment moulded by 
legal, political and social relations. All these may in a sense 
be declared necessary to production ; but as they are in theory 
at least applicable to all alike, they are not to be included 
among the economic factors of production any more than is 
the air which is free to all. Even where these relations in the 
shape of special laws or privileges favor some producers or 
classes, they are properly to be put under the head of oppor- 



282 Production. [§ 122 

tunity to utilize labor and capital rather than under that of 
the primary factors of production. 

Summing up, we may say that the factors of production are 
in one sense labor and capital ; in another sense land, labor 
and capital, and in still a third sense land, labor, capital and 
enterprise. In any sense the factors of production are human 
energy and natural forces, together with their joint product, 
capital, which may again be embodied in land or other ele- 
ments of nature. 

122. Production and the Producer. 

Whatever classification of the agents of production may be 
adopted, one vital distinction must be observed. In the case 
of the non-human factors of production, whether they consist 
of natural forces or the results of the application of labor to 
nature, we have to deal with inanimate objects and phenomena. 
The laws of their increase can be considered without refer- 
ence to any but the technical consequences to the things 
themselves. Where changes, for instance, take place in the 
productivity of concrete things, the social results — that is, the 
influence on classes of human beings — may indeed be pro- 
found, but the objects in themselves still remain inert masses, 
and the laws which control their earnings are irrespective of the 
particular individuals that happen to own them. When the 
machine is useless, we throw it aside ; when the land is worn 
out, we leave it. 

On the other hand, when we deal with human energy, we 
cannot dissociate it from the individual who exerts the energy. 
This does not mean that the laws of production are less verifiable 
here than in the case of inanimate objects. For the personal 
equation or difference between individuals presents no more 
difficulties in analysis than do the diff"erences between things. 
The distinction is to be sought rather in the fact that in 
the one case we deal only with the means and in the other 
with both the means and the end. Human energy, like in- 
animate objects and forces, forms the tools by which wealth 



§ 122] Production and Producer. 283 

is secured ; man alone represents the end for which wealth 
is secured. Hence in dealing with the problems of production 
through human agencies we cannot eliminate the consideration 
of the producer as at the same time a consumer. This has a 
double aspect. 

In the first place it admonishes us that the process of pro- 
duction is social, and that all production ultimately involves 
consumption. Any system of production, therefore, which 
systematically neglects the consuming powers of the producer 
must in the end defeat itself. The methods of production may 
conform to all the approved technical rules, and each industry 
may seem to be flourishing from the point of view of output, 
yet none the less the general condition of business may be far 
from satisfactory owing to the lack of an adequate demand. In 
former times, where production was relatively slight, as in the 
middle ages, or where it was largely based upon unpaid human 
labor, as in antiquity, it was the luxuries of the few rather than 
the wants of the many that constituted the bulk of the demand. 
In modern times, on the other hand, where human energy is 
untrammelled and the play of competition tends to become 
ever more free, the effective demand comes from the wants of 
the many. If we stunt this demand, we withdraw the chief 
stimulus to wealth creation. The human beings may be mag- 
nificent productive instruments, but if there is no market for 
their products their potential energy is not converted into 
actual results. The more democratic the people, the more 
intimate is the dependence of the productive power of the 
community upon the consuming capacity of the masses. 

Secondly, we must be careful to take the broad view of 
the economic process. As we have seen, the real concern of 
economic inquiry is not wealth in itself, but wealth in its rela- 
tion to man, or, still better, man in relation to wealth. A 
system of production which, however successful in other re- 
spects, relegates the human factor to the same level as the 
external object, is uneconomic in the broad sense, because, 
instead of subordinating wealth to man, it sacrifices man to 



284 Production. [§ 122 

wealth. A production of wealth which is based upon disre- 
gard of the human rights of the producer is no more truly 
economic than is the defrauding of one party to a bargain 
by the other. There are certain kinds of so-called produc- 
tion which in the highest economic sense no civilized country 
can afford to retain. Slavery at one time nominally enriched 
antiquity, but it brutalized the slave and enervated the slave- 
holder, until it dried up the sources of production itself. 
Child labor at the beginning of the nineteenth century helped 
to swell the profits of the English factory owner, but was fast 
incapacitating the population, physically as well as mentally 
and morally. If the Devil must be a partner in our cotton 
factories, said Carlyle, we cannot afford to have the cotton 
factories. And in saying this he uttered a truth which was 
no less important in its economic than in its moral aspects. 



CHAPTER XIX. 
LABOR. 

123. References. 

F. A. Walker, The Wages Question (1876), chs. ii-iv and Political Econ- 
omy (1888), part 2, ch. ii; A. Philip, 7/te Function of Labor in the Pro- 
duction of fVeaith (1890) ; A. Marshall, Principles (1907), bk. iv, chs. v, 
vi; J. S. Nicholson, Principles (1S93), bk. i, chs. v, vii; F. A. Fetter, 
Principles ( 1904), ch. xx ; R. Mayo-Smith, Stiit/stics anil Economics (1S99), 
ch. iii; K. Marx, Capital (trans, by Aveling, 1S87), chs. xiii-xiv; W. S. 
Jcvons, Theory (1888). ch. v; J. A. Hobson, Evolutio)i of Modern Capi- 
talism (1906), ch. x; S. and B. Webb, Industrial Democracy (1904), part 
2, ch. vi ; S. Webb and H. Cox, The Eight Hours Day (1891) ; L. Bren- 
tano (trans, by Arnold), Hours and Wages in Relation to Production (1894) ; 
J. Schoenhof, The Economy of High Wages (1892); E. S. Meade, Trust 
Finance (1903), ch. iv ; Thiiieenth Annual Report of the Commissioner of 
Labor on Hand and Machine Labor (1899) ; U. S. Twelfth Census, VII, 
Manufactures, part i. 

124. Meaning of Labor. 

By labor is meant the putting forth of human exertion. The 
attempt to divide it into the categories of physical and mental 
labor is not strictly accurate. The labor of even the most un- 
skilled workman calls for the exercise of certain mental quali- 
ties, like attention, memory and prudence ; while on the other 
hand the intellectual effort of the great captain of industry is 
associated with the expenditure of a certain amount of waste 
of tissue. From the lowest to the highest is a difference in de- 
gree. Ordinary day laborers disclose almost endless varieties of 
ability, skill and technical efficiency, the result of the education 
of hand and brain ; among the employers the differences in 
capacity and energy are no less marked. Labor runs through 

285 



286 Labor. [§ 125 

the whole gamut, from worthlessness to highest efificiency, from 
the mere mechanical repetition of the simplest act to the 
planning of the most subtle and elaborate business scheme 
or intellectual result. 

Under present social conditions we distinguish between 
laborers and capitalists, between workmen and employers. As 
a rough classification available for many practical purposes, 
this is defensible. From the point of view of production, how- 
ever, it is not wholly adequate. Labor is undoubtedly different 
from capital, but the owner of capital may also labor. The 
employer is not the same as the employee, but he may work as 
hard and his contribution to the value of the product may 
be even more important. It is hence a fateful error to con- 
fine the term labor, as virtually do the socialists, to manual 
labor, and to maintain that all wealth is created by labor, with 
the implication that all other shares in distribution are a de- 
falcation from wages and therefore a robbery of the workman. 
Entirely apart from the fact that there are other factors of pro- 
duction, the contention overlooks the labor of organization and 
enterprise, of correlating the scattered elements of produc- 
tion and of adjusting the supply to the varied demands of a 
complex market. Such labor has become under prevalent 
conditions of even greater value to society than the mere 
manipulation of the tools. A modern railway president or 
head of a great industrial trust often receives a salary equal to 
that of several hundred of his workmen, and larger than that of 
the President of the United States. The work may not be so 
irksome as that of the day laborer, but it may be worth far 
more to society, because its contribution to the product is so 
-^ much greater. The real value of labor depends not upon the 
conditions of employment but upon the results of activity. 

125. Cost of Labor. 

Economic production implies the turning out of the greatest 
product with the least cost. So far as the wages of labor form 
an element of cost, it would seem to follow that low wages or 



§ 125] Cost of Labor. 287 

cheap labor is a necessary condition of low cost. Before ac- 
cepting this ostensibly self-evident proposition, however, it is 
necessary to pursue the analysis further. 

In the first place, we must draw a distinction between the 
individual and the social point of view. Even if it were true 
that in a particular industry low wages denoted low cost, it 
would not follow that it is also true from the point of view of 
society. Since production is conditioned by consumption, 
there can be no permanent increase in output without an in- 
crease in demand. The effective demand, however, depends 
upon the income of the consumers. In any community the 
great mass of the consumers consists of the laborers. The 
lower the level of wages, therefore, the more restricted will be 
the total demand foB the national products in general and the 
slighter the chance of reducing cost by expanding the market. 
Low wages which mean low cost in some industries may thus 
indirecdy prevent a reduction of cost in other industries. 
Where a particular set of industries is manufacturing almost 
wholly for the foreign market, the effect may not be so obvious ; 
but since, as in all international trade, imports must ultimately 
pay for exports, the volume of the foreign trade finally depends 
on the capacity of the domestic consumer to utilize what is 
brought in. Thus even the prosperity of the export industries 
may be purchased at the expense of the other branches of pro- 
duction. Irrespective of the general question of the social 
desirability of high wages for the laborer himself, it is clear 
therefore that when we regard public wealth in general, low 
wages do not necessarily mean low cost. The low cost in 
some industries may be outweighed by the higher cost due 
to the lack of consumption or restricted market in other 
industries. 

In the second place, in any single industry low wages do not 
necessarily mean low cost. The real cost of labor is to be 
measured by its productive efficiency. Just as the hundred- 
thousand-dollar railway president is cheap because an inferior 
and low-priced substitute would botch matters and increase 



288 Labor. [§125 

expenses, so in the case of the ordinary wage-earner the real 
cost is to be measured by the ratio of wages to the product of 
labor. In the Philippines the contractors find it in the end 
cheaper to hire the Chinarnen in preference to the natives, al- 
though the former command larger wages; in the Southern 
cotton factories the white laborer is found more advantageous 
than the negro factory hand, who can be hired at a materially 
lower wage. Furthermore, in the same industry and with the 
same workmen neither an increase of wages nor a curtailment 
of labor time necessarily augments cost. Where a reduction of 
hours or an increase of wages succeeds in enhancing energy, 
care and sobriety, the output may be greater than before. Es- 
pecially where fine machinery is used and a high grade of 
intelligence is required to secure the best results, we often find 
a true economy in high wages and a lower cost in shorter 
hours. The relatively cheapest goods which are produced in 
the United States and which successfully compete in foreign 
markets with the products of low-priced labor are certain iron 
and steel manufactures, boots and shoes, clocks and the like, 
where the wage-scale is notoriously the highest. 

/ Of course it does not follow that every increase of wages 
or reduction of hours will lower cost. There is at every 
period and in every industry a limit beyond which the in- 
crease of efficiency will be overtaken by the greater outlay, 
and it is quite possible that there may be no increased 
efficiency at all. In such cases higher wages do indeed mean 

V^ greater cost. The mere fact, however, that goods sell at low 
prices tells us nothing as to the comparative rate of wages in 
that industry. The cheapness of so-called white goods in a 
department store may be due to the low-priced labor in the 
sweat-shops ; the cheapness of a Waltham watch may be 
compatible with the very highest wage-scale. So f^ as labor 
is a factor of production, cost depends not merely upon wages, 
but upon wages as compared with output. Under certain con- 
ditions there is a true economy in high wages; the more a 
workman is paid, the less he may cost. 



§126] Efficiency of Labor. 289 

126. Efficiency of Labor. 

Since the ultimate factor in the relation between labor and 
cost is productive efficiency, the problem of increasing the 
efficiency of labor is of paramount importance. The older 
economists were fond of emphasizing the dependence of the 
demand for labor upon capital. While their analysis was in 
many respects valuable, they overlooked the independent power 
of labor to contribute to its own uplifting through an increase 
of efficiency. It is precisely here that the economic effects of 
education and leisure as well as of social and political progress 
mean so much to the community. In the commercial warfare 
that is being waged between nations to-day, education is recog- 
nized as a potent weapon. In the United States the old-time 
prejudice against the college-trained business man has given 
way to the recognition of his superiority ; technical and com- 
mercial schools of all grades are being multiplied, and even 
the primary and secondary institutions are adapting their 
curricula more successfully to the needs of the ordinary man. 
The gist of the negro problem in the South is seen by all 
careful thinkers to consist in the increase of productive effi- 
ciency through an appropriate education of the negro. The 
hope for the Filipino is to be found in the possibility of train- 
ing him to habits of orderly and consecutive work. With 
him, as with the laborer at home, the significance of a higher 
standard of life — which is only another way of stating the 
basis of greater productivity — is to be found not only in the 
domain of distribution and consumption but in that of pro- 
duction. The finer the tool, the greater will be the product ; 
when the tool consists of human energy, we have not only a 
greater product, but a greater capacity in the human being 
to utilize the product. The short-sighted employer to-day is 
concerned only in securing the ostensibly cheapest workman 
and in driving him to the utmost ; the long-sighted employer 
finds it profitable not only to pay fair wages for moderate 
hours, but to surround his workmen by an environment of 

19 



2go Labor. [§127 

cleanliness, comfort and attractiveness, with provision for rest, 
recreation and education. No one who attended the St. Louis 
Exposition in 1904 could have failed to be struck by the ex- 
hibits of the Westinghouse Company of Pittsburg and of the 
National Cash Register Company of Dayton, with the remark- 
able arrangements for the welfare of their workpeople. Yet it 
can scarcely be doubted that it is " good business " on the 
part of the employers, and that all these seemingly needless 
and sentimental expenditures really involve a lowering of cost 
of production through enhanced efficiency of labor. 

We thus see the close interrelation between production and 
civilization. Not only is a lowering of cost the basic condition 
of increasing wealth and progress, but the physical, moral and 
intellectual advance of society inevitably reacts upon the indi- 
vidual and renders him a more capable and efficient agent of 
production. State and church, science and art, have their 
deep economic significance. Progress is at once a result and 
a cause. The true reduction of labor cost of permanent im- 
portance is that caused by increased efficiency. The more of 
a man a laborer is, the better tool he becomes. Whatever 
society does to improve the individual will be more than 
repaid by an augmented production of wealth. 

127. Nature and Advantages of Division of Labor. 

In the progress of efficiency perhaps the greatest factor has 
been the principle of specialization or division of labor. In 
its deepest aspects it is one side of the biological law dis- 
covered by von Baer and elaborated by Herbert Spencer, — 
the growth of all life from uniformity to multiformity, from an 
incoherent homogeneity to a coherent heterogeneity. From 
the economic point of view division of labor may be put into 
four categories, — the social, the industrial, the technical and 
the territorial division of labor. 

(i) The earhest illustration of the social division of labor 
is the differentiation of economic function between man and 
woman. In aboriginal society certain kinds of work were 



§ 12 7] Advantages of Division. 291 

assigned exclusively to the female. We have seen the influ- 
ence of women's work upon the evolution of the later economic 
stages. Even to-day, when all careers are open to women, 
there is a natural tendency for female labor to concentrate 
itself in those groups where women possess a peculiar efficiency 
and where there is the least possible competition with men. 

Apart from sex cleavage the earliest example of differentia- 
tion of function was through the formation of social classes. 
At first every one had to fight to secure his food and fight to 
retain what he had secured. The separation of a permanent 
military class from the industrial group was a great step in the 
efficiency of each ; it is not yet found in even so comparatively 
developed a society as that of the American Indian. The 
development of a priestly class, again, although of chief impor- 
tance from the social and religious point of view, had a note- 
worthy economic effect in that it permitted the industrial 
class to devote itself more unremittingly to the daily tasks of 
production without giving so much of its time to the inde- 
pendent propitiation of the malevolent spirits. The priests 
were in truth a labor-saving device. 

It took ages for the originally homogeneous industrial group 
to split up into great classes. Even after centuries of prog- 
ress the husbandman's family not only worked up the raw 
material into roughly finished products, but exchanged super- 
fluities with their neighbors. The cultivator was a handicrafts- 
man and a trader, as he is still in part to-day on the American 
frontier. An independent class of traders was slowly differ- 
entiated, and with the originally greater importance of extra- 
tribal commerce the traders were usually the aristocrats. It 
is only where economic conditions were inimical to commerce 
and engendered the predominance of a land-owning aristoc- 
racy as in some of the feudal states of mediaeval Europe and 
Japan, that we find a contemptuous attitude toward trade, and 
especially toward the small trader, who was often at the same 
time a petty craftsman. Finally, the artisans are separated 
from both farmers and traders, and we notice the development 



292 Labor. [§127 

of the industrial class in the narrower sense of the term, as 
distinguished from the agricultural and commercial classes. 
With every step in the progress of society we have a further 
division of labor within each class until we reach the modern 
bewildering complexity of occupations and professions. 

(2) Just as the social division of labor has denoted in- 
creased efficiency of each group, so within the sub-groups we 
find the second form of division of labor, which may be called 
industrial specialization. In the textile industry, for instance, 
certain mills manufacture only yarns ; others do nothing but 
weave yarns into cloth ; and still others merely dye and finish 
the product of yarn-spinning and weaving mills. In New 
England there are shoe factories which make only " uppers "^ 
and others which produce nothing but " findings " (counters, 
shanks and heel-stififeners) . In the glass industry large estab- 
hshments turn out only one kind of bottle. Some branches 
have even become so completely speciahzed that there are 
factories, as in the bicycle and electrical supply industries, where 
nothing is done but assemble the parts of a machine or in- 
strument that are made in other establishments. The advan- 
tages of this kind of specialization are numerous and obvious. 

(3) Thirdly, we find within each particular business enter- 
prise an increasing separation of industrial functions known as 
the technical division of labor. This is a specialization of 
process within the same establishment rather than a specializa- 
tion in different estabhshments. It may also be declared to 
be a specialization among workmen in contrast to the indus- 
trial division of labor which is a specialization among employ- 
ers. It is clear that specialization of the workman saves time 
both in preparation for the trade and in execution of the task, 
while the greater familiarity with a single process vastly aug- 
ments his dexterity. It is no less obvious that the greater the 
specialization the greater will be the chance of the right mai> 
falling into the right place, thus faciltating the adaptation 
of means to end. A trip through any modern factory will 
disclose tens — nay, even hundreds — of separate processes 



§ 12 7] Advantages of Division. 293 

designed to turn out a product which in former times was 
entirely made by a single individual. A good example of such 
a subdivision of labor, resting still upon human labor force 
alone, is to be found in the manufacture of ready-made coats, 
which is now in New York divided into no less than thirty-nine' 
distinct processes.^ 

It is, however, in cases where ample technical auxiliaries 
are used that we find the most minute subdivision of labor. 
Human energy can then be reduced to the repetition of a 
single act like a thrust, a pull, a stroke or some other simple 
manipulation of a machine. The reduction of cost often 
progresses in a far greater ratio than the increase in the number 
of processes, for we have here to deal not only with the en- 
hanced dexterity of the workman but with the almost endless 
succession of labor-saving devices. To make a shoe in some 
New England factories requires 173 different operations, each 
conducted by a class of laborers with a special name. The 
manufacture of a fine watch calls for no less than r,o88 dif- 
ferent sets of workmen (not including the operations of fur- 
nishing the power), each using a different kind of machine. 
The saving in cost due to the introduction of machinery can 
be illustrated in the jewelry and iron business ; under the 
machine method 1,020 gold 'filigree shells for cuff buttons 
can be completed in the same time as one by the hand 
method ; in the production of screws where one man can oper- 
ate from six to twelve machines the ratio of machine to hand 

1 These thirty-nine classes of workmen are : i. Fitter ; 2. Pocket-maker ; 
3. Canvas-baster ; 4. I.apel-padder ; 5. Bar-tacker ; 6. Seam-presser ; 7. 
[jning-maker ; 8. Lining-operator ; 9. Sleeve-maker; 10. Lining-presser ; 
1 1. Sleeve-presser; 12. Collar-padder ; 13. Shaper; 14. Tape-fuller; 15. 
Lining-baster ; 16. Operator; 17. Presser ; iS. Edge-cutter; 19. Edge- 
baster; 20. Shoulder-lining baster ; 21. Shoulder-operator ; 22. Edge sleeve- 
baster ; 23. Collar-baster ; 24. Sleeve-presser ; 25. Joiner of collar to lapel ; 
26. Armhole-baster ; 27. Sleeve-sewing operator ; 28. Garment-examiner; 
29. Collar-finisher; 30. Armholelining finisher; 31. Basting-puller; 32. 
Edge-presser ; 33. Buttonhole-cutter ; 34. Buttonhole-maker ; 35. Hanger- 
sewer ; 36. Presser of entire coat ; 37. Button-marker ; 38. Button-sewer ; 
39. Biisheller. 



294 Labor. [§ 128 

product is 4,49 1 to i. In the historic example of pin -making, 
where a single workman unaided could originally turn out only 
a few pins a day, but where in Adam Smith's time his prod- 
uct was five thousand pins a day, the daily product per work- 
man is now about fifteen millions of pins, complete and stuck 
in the paper. The tables opposite pages 294 and 295 will 
illustrate the contrast between hand and machine labor in 
various occupations in the United States. It is obvious that 
the technical division of labor is dependent on the existence 
of a vast market. The mass production, which results from 
the improvement of technique through division of labor, and 
the substitution of machine for hand methods, is profitable only 
when the demand for a cheap product is so elastic as to be 
susceptible of great increase. Division of labor and increase 
of output are thus correlated. Each is in turn the result of 
the other. 

(4) Fourthly, the principle may assume the form of local- 
ization or territorial division of labor. In large cities we find 
the most important wholesale houses in any line of business 
assembled in districts by themselves. In nations we find 
various industries congregated to a large extent in localities 
which possess some peculiar advantages, such as proximity to 
raw materials, water power or niarkets, favorable climate, cheap 
labor, and supply of capital or credit facilities. In the world 
at large the principle of the territorial or geographical division 
of labor is the chief foundation for the free trade argument. 
By allowing each section to produce that for which it is best 
fitted, we shall manifestly secure the greatest and the cheapest 
production. In all cases, whether we have social, industrial, 
technical or territorial division of labor, the result is an 
enhanced efificiency of labor and a proportionate increase of 
wealth. 

128. Defects of Division of Labor. 

While the principle of the division of labor is undoubtedly 
salutary, there are certain dangers which must not be over- 



HAND AND MACHINE LABOR. 

NUMBER OF HOURS WORKED UNDER EACH METHOD 
IN PRODUCING SELECTED UNITS OF MANUFACTURE. 



DESCRIPTION OF UNIT. 



NUMBER OF HOURS WORKED. [ 1 ""~° 

I I MACHINE 



PITCHFORKS 50 PITCHFORKS. 12 INCH TINES 
PLOW 1 LANOSIDE PLOW, OAK BEAMS AND HANDLES. 
BAGS 5,000 COTTON FLOUR SACKS. 

t3l AMl/Dnniyc 12 CROWN LEDGERS, 8 "-^X 14 J^ INCHES, 
tSLANKBUOKS ^qq p^Q^g puLL SHEEP. 



10 PAIRS MEN'S FINE GRADE, CALF, WELT, 
LACE SHOES, SINGLE SOLES, SOFT BOX TOES. 
1.000 STRAWBOARD, PAPER-COVERED, 



SHOES 

DWAC.D SHOE BOXES, 11/0X6 X ija INCHES 

CRACKERS 1,000 POUNDS GRAHAM CRACKERS, PACKED. 

_,__ 200 YARDS INGRAIN CARPET, COTTON WARP, 
CARPET WOOL FILLING, 1038 ENDS, 26 PICKS PER INCH, 

1 ELLIPTIC SPRING, LEATHER TOP BUGGY, 
^.r>r-.i A/-ir PIANO BODY, DROPPED AXLES, 
CAKKIAtit. BANDED HUBS, CLOTH TRIMMINGS. 

10 GOLD HUNTING WATCH 
lA/AT/^u n/iCCC CASES, 18 SIZE, ENGINE TURNED, 
VVAIl^n l-ftOtS BARLEYCORN SHEILD PATTERN. 

1 KEY-WIND, BRASS 
WATCH MOVEMENTS HUNTING WATCH MOVEMENT, 

-_^..p- 1 GROSS HORN DRESSING COMBS, 7 X 1^^ INCHES, 
CUIVlDb COARSE AND FINE TEETH 1 /4 INCHES. 

BARRELS 100 flour barrels, patent hoops. 

ROPE 300 POUNDS?/INCH HEMP BALING ROPE 

rriQ<^FT^ 1 DOZEN MEDIUM SATEEN CORSETS, 
UUKSt I S ,7 EYELETS IN BLACK. 



C-IDC-ADA/IC ^ DOUBLE BARRELED, BREECH LOADING, 
1-IKhAKMb HAMMERLESS SHOTGUN. 



FOLDING, STITCHING.-AND COVERING 2,000 

MAGAZINES copies-96-page magazine, b^xoI^inches 
NEWSPAPERS printing_and folding 3.e.,ooG_PAGES. 



TYPESETTING 100,000 ems, newspaper work. 

_ 100 ELECTROTYPE PLATES, 

ELECTROTYPING 8.'^x7,'mnches. 

_ M^r> .,,,., ,~ 1 WOODCUT. 7.V X 9 INCHES, SAME 
t.NljKAVIINla PATTERN UNDER EACH METHOD. 

ENVELOPES 50,000 NO. e)^ plmn white envelopes. 
BUTTER 500 pounds, in tubs. 

1 DOZEN white muslin SHIRTS, PLAITED LINEN 
SHIRTS BOSOMS, LINEN COVERED COLLARS AND CUFFS 

ATTACHED. 
1 01 l\ri~cc l^ OAK FRAME, ROUND END, PLUSH COVERED 
LUUNLatb LOUNGES, 69 X 23 INCHES, ANTIQUE FINISH. 



GRANITE DRESSING 160 SQUARE FEET. 



1896 
1870 
1»'J6 
18(iO 
18'J0 

18G2 
1895 
1SG.5 
1895 
1867 
1895 
1858 
1895 
1800 
1895 
18(j5 
1895 
1850 
1897 
1862 
1896 
1815 
1895 
1895 
1895 
1875 
1896 
1856 
1896 
1855 
1895 
1889 
1897 



1895 
1895 
1867 
1896 
1895 
1895 
1865 
1895 
1883 
1895 
1855 
1896 
1866 
1897 
1853 
1896 
1860 
189i 
1800 
1896 
1895 
1891 



XSJ^ 



MDS^S^^^ 



mr '■'■■■■T^ 



•"Hixr-^v^'^^-^^i^t^j^ijjji 



•^^ 



.•14.5111 



JEOIE 



-^^ 



WW . 00 ,, 



351333^^^ 



^ 



174-97 



TIT 



:^ns^^^^^^ 



.Mifift-^ 



Hi 8 



JUOO' 



mmz 



if^ 



SCSET 



3013^^^^^ 



mu 



1-,1 ^n ~g^ 



jor 



■i>16'0f(^^jjjj:?j:?^?^^ 



,'2Si. iio":':'s ;M^?^^?^^m^ ^ i 



-'"'.I 00 



^^ 



-^sasHj^^^^^ 



Mjml 



nasEi;^ 



lal78 



2ES3^^^^^^ 



nsszEi^^ 



JJJlOS 



■Tl'l' -jj^ 



zasn^^^^^^ 



-lajoo 



2IOIE 



From U.S. Labor Bulletin 54 



HAND AND MACHINE LABOR, 

NUJVIBER OF HOURS WORKED UNDER EACH METHOD IN PRODUCES SELECTED UNITS. 



DESCRIPTION OF UNIT. 



YEAR 
PRODUCED. 



NUMBER OF HOURS WORKED. 



AGRICULTURE. 
BARLEY 100 bushels. 
CARROTS 10 TONS long orange. 

rORM 5° BUSHELS, SHELLED; STALKS, HUSKS, ■ 
'-"jrsiN Afjp BLADES CUT INTO FODDER. 

CORN 50 BUSHELS, HUSKED.) STALKS LEFT IN FIELD. 

COTTON SEED COTTON, 1,000 POUNDS. 

HAY HARVESTING AND BALING 8 TONS TIMOTHY. 

OATS 160 BUSHELS. 

PEASE 60 BUSHELS. 

POTATOES 500 BUSHELS. 

RICE 10,000 POUNDS ROUGH. 

RYE 100 BUSHELS. 

STRAWBERRIES 500 QUARTS. 
SWEET POTATOES 50 bushels. 
TOMATOES 100 bushels. 

WHEAT 50 BUSHELS. 

MINING. 

COAL 50 TONS BITUMINOUS. 

QUARRYING. 
DRILLING GRANITE eo 2% inch holes, i'/z feet 

L^rvii_i-iiNVj v^riMiNi I t pggp^ 1^ ORANITE ROCK. 

npii I iMrt Qnru 62inch holes, 12 feet deep, 

UKILLINbKOCK in HARD BLUE ROCK, 
GRANITE QUARRYING.50 CUBIC FEET. 

LIMESTONE quarrying 100 tons. 
MARBLE quarrying 72 cubic feet. 
RED ROCK quarrying 40 TONS. 



TRANSPORTATION, Etc. 

, ^ TRANSFERRING 6,000 BUSHELS 

LOADING GRAIN WHEAT from storage bins or 

ELAVATORS TO VESSEL^ 

LOADING ORE loading 100 tons iron ore on cars. 

TRANSFERRING 200 TONS FROM 

LMMLOADING COAL canal boats to bins 

400 feet distant. 
UNLOADING COTTON transferring 200 bales 
from vessel to dock. 



1829-30 
1895-96 
1850 
1895 
1855 
189it 
1855 
1891 
1841 
1895 
1860 
1891 
1830 
1893 



1895 

1870 

1895 

1817-48 

1891-95 

1871-72 

1894-95 

J868 

1895 

1870 

1895 

1829-30 

1895-96 



1897 
1897 
1896 
1896 
1890 
1896 
1866 
1897 
1876 
1896 
1896 
1896 



1853 
1896 
1891 
1896 
1859 
1896 
1860 
1896 



SJoT 



tosr 



i^^48afea 



jSM 



i^i< -^^-^i^-mm 



3:21: 



'M v. I 



•2ol.'Xi 



2ii;.r,i :m mss:i:)i^ 



•Kt.ta I 



■m.-:2 =!!m;^m 



'mmm~>iiimmmm^ 



WW 



^^^^3i05^^^^^ 



22161 



aw 



i^ 



_UJ 



-iSll.fi7 



^^^■^-;i:WJ57 



^I.I IIX 



?~:^j^x ;j:i:<;j;j:;2iJ5: 



soon 



A.! (.11 I 



rrr 



JXMF 



^^iiims 



7;i.t:0 I 



From U.S. Labor, Bulletin 54 



§ 128] Defects of Division. 295 

looked. These are the risks involved in specialization of any 
kind. A great scientist has been described as one who knows 
something about everything and everything about something. 
Specialization in such cases is illuminating. Many specialists, 
however, know a great deal about some one thing and nothing 
about anything else. Specialization here is narrowing and 
even dangerous, because it tends to prevent a broad power of 
successful generalization. In the economic domain the risk is 
the same. In the social division of labor a particular sub- 
group may pursue its own interests so closely as to subordinate 
to them the public interest, thus preventing an even and well- 
rounded economic development. In the territorial division of 
labor the dependence of a section or country upon one par- 
ticular product may be perilous in time of some suddenly 
enforced cessation of production, as in the case of the potato 
famine in Ireland in the forties, or it may check progress, as in 
the case of the one-crop system or the sole reliance of a 
country upon agriculture. In the technical division of labor 
the confining of the individual workman to the mechanical 
repetition of a simple act may tend to make him a machine 
rather than a man, and to stifle and repress all the powers of 
initiative. This is in fact the one great indictment brought 
against the modern industrial system. 

The danger, however, can be averted. In the social division 
of labor a developed sense of social solidarity, of business ethics 
and of political responsibility will insure a continually growing 
adaptation of the parts to the whole. In the geographical 
division of labor a sound industrial and commercial programme 
will, as we shall see, strive for a diversification of industry by 
supplementing, and within certain limits altering, nature. In 
the technical division of labor the qualities which lie dormant 
during the hours of work may be awakened by a judicious ad- 
mixture of leisure, and by a different attitude toward the work 
itself, which can be brought about in large measure by techni- 
cal and industrial education. If machine industry and division 
of labor simply brought to the workman greater intensity of 



296 Labor. [§ 129 

work, as the socialists contend, the result would be disastrous. 
But if, as is often the case, the increased productivity brings 
with it higher wages and shorter hours, the workman's whole 
standard of life may be elevated, and his daily task need no 
longer engross the whole of his physical and mental energy. 
Under proper leadership within his own ranks and in those of 
the employers, he may be a part of the machine, and yet not 
only remain a man but become more of a man than before. 
The highest grade of American labor to-day is not the cobbler 
who makes the whole shoe, but the specialist heel-finisher in 
the New England shoe factory. Under such conditions, as 
they are disclosed by progress in the most advanced nations, 
division of labor may be a blessing instead of a curse, and re- 
main an aid to production without becoming a menace to 
individuality. This result, however, cannot be reached without 
a struggle to retain the use, while overcoming the misuse, of 
what is an essentially beneficent principle. 

129. Combination of Labor. 

Division of labor does not describe the whole of the process. 
To be effective it must be supplemented by the combination 
of labor. This also assumes several forms. 

(i) First, we have the combination or co-operation of labor 
with another agent of production, like capital. We have seen 
that the advantages of the technical division of labor are most 
signal when machinery is employed. Obviously the larger the 
quantity of labor that is saved through the aid of capital, the 
higher will be the productivity of each remaining unit of 
labor ; the more complex the entire process, the simpler will 
be each single portion. Without the co-operation of the two 
factors, the division would be less minute and the output less 
abundant. Modern division of labor is largely the result of 
the application of capital. 

(2) Secondly, we have the technical combination of units 
of labor with each other. This combination may be successive 
or simultaneous. In the so-called team system in the clothing 



§ 129] Combination of Labor. 297 

industry, for example, although each set of workmen does its 
allotted share, it is most important that they all proceed in 
unison, so that no set completes more or less than can be 
handled by the next. Here we have successive combination. 
In a great steel foundry or rolling mill, on the other hand, each 
detail of the work may be apportioned to a separate class, but 
unless they all co-operate exactly at the critical moment the 
product will be worthless. Here we have simultaneous com- 
bination. In both cases the combination is effective because 
of the division of labor ; or, better stated, the result is due to 
the joint influence of combination and division. 

(3) Thirdly, we have the combination due to the fullest 
utilization, from the outside, of the result of each contribution 
to the product. In social division of labor this is brought 
about by the principle of competition or of societary control ; 
in territorial division of labor it is produced by the natural 
forces of location ; in technical division of labor it is effected 
by the organization of industry. Herein lies the great role of 
the manager and employer of labor, — the entrepreneur in the 
technical sense. The head of a great department store or of 
a vast factory is akin to a general. He must be at once bold 
and prudent, and must look with one eye to the ranks and 
with the other to the enemy, his competitor. He must be full 
of resources and of foresight. Above all, he must not only 
have an army well disciplined down to the smallest detail, but 
must possess the capacity to take a large view, massing his 
forces at just the time and in just the manner to be most 
effective. In short, thorough organization and co-operation 
are the secrets of industrial as of military success. The 
great leader is as indispensable in the one career as in the 
other. 

Combination of labor is thus the complement of division of 
labor. The most efficient use of the one involves the employ- 
ment of the other. Specialization and co-operation are the 
obverse and the reverse of the same medal ; they are as neces- 
sary to a developed economic life as are the individual and 



298 Labor. [§ 130 

social elements to human life, or the centripetal and centrifugal 
forces to all life. 

130. Supply of Labor. 

Since labor is a productive agent that is susceptible of in- 
crease, it might seem that the supply of labor will in the long 
run respond to the demand, so that there will never be a de- 
ficiency or a surplus. The situation, however, is by no means 
so simple, even if we confine our attention to ordinary labor, 
and abstract from that for which special education or remark- 
able natural gifts are required. 

In the first place, there may be climatic or racial reasons 
which restrict the supply. In the tropics it is sometimes diffi- 
cult to induce the natives to work for any consideration. 
Again, under conditions of forced labor, the source of supply 
may dry up ; the downfall of the Roman empire and the 
decline of prosperity in the South before the war were due 
to the fact that cessation of conquests in the one case and 
the stoppage of the African trade in the other finally made the 
slave too expensive, by limiting the supply. Even under the 
modern system of free labor there may be both artificial and 
natural obstacles. We prohibit Chinese immigration, although 
by so doing we retard the exploitation of the natural resources 
of the Pacific slope. We prefer a more equable, even if slow, 
development to the rapid tempo associated with diminished 
opportunities to the American workman. A less defensible 
restriction of supply is seen in the short-sighted policy of some 
trade-unions which, following the example of the mediaeval 
guilds, seek to secure monopoly returns by interposing all 
manner of obstacles to membership. Such methods, however, 
involve a restriction in the supply of special kinds of labor 
rather than of the general labor force, and invariably react 
upon the workmen outside of the particular unions. Finally, a 
natural obstacle to the free adjustment of the supply is seen in 
the case of the so-called seasonal demand. There are occu- 
pations where labor is needed only at stated intervals, as for 



§ 130] Supply of Labor. 299 

instance in farming at harvest or vintage time. Yet the laborer 
must live during the whole year. Whenever economic con- 
ditions do not permit a scale of wages sufficiently high to sup- 
port the workman during the interval.-: of non-employment, we 
find these periodical complaints of scarcity of labor. 

On the other hand, a striking example of the relative over- 
supply of labor is afforded by the substitution of machine for 
hand labor. The introduction of machinery, however, does 
not mean a diminution in ultimate demand. For the decrease 
in cost and price due to machine methods leads to such an 
enhancement of output that even with a relative falling off 
in the number of laborers there will ultimately be an increase 
in the total aggregate of laborers employed. The replacing of 
the stage-coach by the railway finally led to a vast increase of 
laborers at higher wages, coupled with a service at lower cost. 
This result will of course ensue only when the increased profits 
due to the new machinery are saved and invested in new cap- 
ital which gives employment to more laborers. If the profits 
are wasted instead of being saved, new machinery will be of 
no advantage to the laborer. In point of fact, however, the 
profits are normally saved. The immediate result is often a 
temporary oversupply in the particular trade and the discharge 
of workmen who for the time being, and until they finally 
drift to the new openings, swell the ranks of the unemployed. 
One of the most serious problems of the modern industrial 
system is how to mitigate the evils of this transition period. 

In the long run, however, under modern conditions of the 
free play of economic forces the supply of labor will adjust 
itself to the demand through changes in the growth of popu- 
lation. The fundamental point here, however, is the rate of 
remuneration or scale of wages, — a discussion of which must 
be left to the next book. 



CHAPTER XX. 
LAND. 

131. References. 

J. B. Clark, Distribution (1899), ch. xiii ; R. Mayo-Smith, Statistics and 
Ecotiomics (1899), ch. iv ; A. Marshall, Principles (1898), bk. iv, chs. ii, 
iii ; H. R. Seager, Introduction (1904), ch. vi ; A. S. Johnson, Rent 
in Modern Economic Theory (Am. Econ. Assoc. Publications, 1902), 
ch. ii ; R. M. Hurd, Pi-inciples of City Land Values (1903) ; M. B. Ham- 
mond, The Cotton Industry, part i, The Cotton Culture (Am. Econ. Assoc. 
Publications, new series, no. i, 1897) ; E. J. Payne, History of America, I 
(1892), 342, 366-384; U. S. Industrial Commission, Report (1902), X, and 
XIX, 46-123; J. B. Clark, Essentials of Econo7nic Theory (1907), ch. xi 

132. Land as a Separate Factor of Production. 

Land is generally distinguished from capital as a separate 
factor of production. The distinction, however, is sometimes 
made on insufificient grounds. 

(i) It is claimed, for instance, that land is a gift of nature, 
while capital is a product of labor. It must be remembered, 
however, that economics has to deal with value, and that from 
the point of view of value it is difficult to draw so sharp a line. 
Into many tracts of land there has been put as much labor as 
into equally valuable concrete products. Without the dykes of 
Holland and the irrigation works of arid America the land 
would be worthless. In some garden plots on the European 
continent the tenant on leaving is permitted to take with him 
several inches 'of soil, — the value of the land is as much or 
as little a product of labor as in the case of other things. It 
may be contended, however, that the value of urban land at 
least is not a product of labor. But how about the value of a 
newspaper, or a banking business ? As the country town be- 

300 



§ 132] Land and Production. 301 

comes a prosperous city, the newspaper, like the corner plot, 
becomes more valuable, even though the editor works no harder 
than before. The circulation increases through the operation 
of the same social forces which raise the value of the land. 
There may indeed be more newspapers, but there will also be 
more corner plots. Even if we attempt to reduce values to the 
quantities of labor, it is hazardous to distinguish between land 
and capital on this ground : in a diamond drill, which is as- 
suredly a piece of capital, the overwhelming share of the value 
may be ascribable to the raw material or gift of nature, and 
only a small part to labor ; in a truck-farm, three-quarters of 
the value of the land may be found in labor and only a quar- 
ter in the gift of nature. In other words, in the value of 
some land, labor plays a large role ; and in the value of some 
capital, nature plays a large role. This distinction is hence 
inadequate. 

(2) Again, it is contended that land is indestructible, while 
capital is perishable. Here, again, the rejoinder may be made 
that the qualities which give value to the land are not indestruc- 
tible. It is a commonplace that the chemical ingredients of the 
soil need to be constantly renewed. The best agricultural land 
may become the worst, and the worst the best, after a few 
generations of exploitation or thrift, as the case may be. But 
surely, it will be said, the qualities of extension or location are 
indestructible. Even here, however, it must be observed that 
the two things are not identical. The mere extension of land 
is indeed indestructible, but it gives no value. All land is 
alike in extension, — the worthless and the valuable. Location 
is extension plus situation, just as fertility is extension plus 
chemical ingredients. Location gives value to land, but loca- 
tion is not indestructible as an economic factor. The land 
may remain, but the value may change because of an alteration 
in its contiguity to a market. The land is still there, but the 
market may disappear, and thus to all intents the economic 
location of the land suffers a change. Any falling off in 
demand such as a decrease or shifting of population, a change 



302 Land. [§ 13a 

in commerce, an alteration in the conditions of transportation, 
may reduce or wipe out land values. In the deserted mining- 
towns of the West the value of the land has vanished, perhaps 
never to return. Value is a product of human relations : 
nothing human is indestructible. 

(3) It is often said that land is fixed in quantity and not 
reproducible. To this the double answer may be made : some 
other things are non-reproducible as well, and in the true 
economic sense land itself is really not fixed in quantity. 
Reproducibility is a relative term : some things can be easily 
reproduced; some with difficulty; some, like old coins or 
works of art, not at all. Furthermore the supply of land can 
be increased both actually and relatively. There have always 
been, and still are, vast stretches of unused and worthless land 
in every country and of comparatively worthless land near 
every city ; whenever it becomes profitable, new areas are put 
under cultivation or covered with residences. The striking 
fact of the past century has been the increase in the supply of 
arable land and the growth of urban areas. Even, however, if 
all the land in a given county or city is occupied, its economic 
utilization can be increased, and that is equivalent to a relative 
growth of supply. More intensive farming in the country or 
better or higher structures in the city have the same effects as 
an increase in supply. The limit here, as in all economic 
goods, is the margin of utilization. 

While the differences between land and other things that 
constitute capital are thus differences in degree rather than in 
kind, it remains none the less true that land may usefully be 
put into a separate category. This is due to the fact that an 
increased supply of other things in general involves a dupli- 
cation of the thing itself, while the increased supply of land 
involves a difference in location or fertility. To call this the 
law of diminishing returns is in one sense inexact, since the 
law of diminishing returns is applicable to everything that 
possesses value. The law of diminishing returns, however, has 
peculiar consequences when applied to land. If an employer 



§ 133] Fertility. 303 

needs more laborers, he can ordinarily secure an increased 
supply at the same wages, even though there is a certain point 
beyond which it does not pay him to employ more. If a 
manufacturer needs additional machines, he can ordinarily buy 
them at the same price, even though he will buy only up to a 
certain limit. In fact the progress of society means more 
machines or more capital and lower cost. But if more land is 
needed, recourse must be had to less fertile or less well-situ- 
ated land, which normally means a higher cost. The more 
intensive farming or the higher structures referred to in the 
last paragraph amount indeed to an increase in the supply of 
land, but they also involve an increase of cost. 

Economic progress, then, may have different effects on land 
as compared, not indeed with all other things, but with the great 
mass of other production goods. The advance of invention 
and civilization is apt gradually to reduce the prices of manu- 
factured articles, but the increase of output and of civilization 
may lead to a greater demand for given tracts of land, and there- 
fore to an increase in their price. A moderate tax on ordi^ 
nary commodities, reproducible at pleasure, tends to decrease 
their number and thus to increase their price ; a similar tax on 
the value of land is apt to exert no influence on its existence, 
and therefore none in increasing its price. 

While land thus is a part of capital from the point of view 
of the laws which explain the nature of rental value in gen- 
eral, and the relation of rental to capital value, land is usefully 
contrasted with capital if we compare changes in land rents 
and values with changes in the great mass of other things, the 
increased production and accumulation of which constitute 
progress. Because of the social significance of such relative 
changes, it is legitimate to put land into a separate category. 

133. Fertility of Land. 

Land has value as a factor in production either because it 
yields some concrete produce or because it affords a service as 
the physical support of man. The productivity of land, that 



304 Land. [§ 133 

is, the value of its contribution to wealth, depends in either 
case on two facts, — its fertility and its situation. The fertility 
is a result of the constituents of the soil combined with its 
extension ; situation is not simply extension, but geographical 
location. According to the uses to which land is put, we 
divide it into the categories of pasture, agricultural, forest, 
mineral and urban land. Each of these is again divisible : 
pasture land, for instance, into sheep, goat, hog and cattle 
pasture ; agricultural land into meadow and plough (or arable) 
land with as many sub-classes as there are varieties of crops; 
forest and mineral lands according to the character of the 
timber or mineral (including under this designation such non- 
metallic products as coal and oil) ; urban land into business, 
residential, apartment or tenement land. 

So far as the element of fertility is concerned, land, like all 
other forms of wealth, is subject to the law of diminishing 
returns. In agricultural land there is at every moment a max- 
imum return from the application of a given amount of labor 
or capital. As we have seen above (§ 88), the margin beyond 
which the returns begin to diminish may be an intensive or an 
extensive margin. When this margin has been passed, we 
must, in order to secure the same yield, either renew the fer- 
tility of the old plot or select a fresh plot. But the marginal 
point is always definitely ascertainable. In a small and lonely 
New England farm the best results may come from employing 
a laborer for every few acres and not utilizing expensive imple- 
ments ; in the far West it may be more profitable to use the 
costliest machines and to economize in human labor; in a 
truck farm the application of rich manures may yield the 
greatest profits. In all cases ' there is a point beyond which 
any additional " dose " of capital or labor will give propor- 
tionally smaller returns. Under normal conditions of progress 
the self-interest of the individual farmer may be relied upon to 
ascertain this point. Under a system of free competition each 
farmer will seek to secure the largest produce from his land, 
and the greater the output, the lower will be the price. The 



§ 133] Fertility. 305 

private interest of the producer will thus tend to coincide with 
the general interest of the community. This is at once the 
basis and the justification of private property in agricultural 
land. 

In the case of timber land this coincidence between private 
and public interests is by no means so unqualified. In grazing 
land the pasture replenishes itself from season to season ; in 
agricultural land the crop follows within a few months, or, as in 
the case of fruit lands, within a few years of the application of 
labor or capital. But in forest land the reproduction of the 
grove takes decades or even centuries. A wise forest policy 
which endeavors to insure a continuous supply to the public will 
therefore content itself with felling only the ripe timber. Private 
interest, on the other hand, which looks to immediate gains may 
derive more profit from the complete clearing of the forest. 
When the woods are practically inexhaustible, as in the early 
period of American civilization, it makes but little difference. 
But when the forests are destroyed to such an extent as not 
only to cut off the supply of useful woods but seriously to en- 
danger the equable flow of the streams and to threaten, as in 
Spain, an alternation of complete drouth with devastating inun- 
dations, the situation becomes serious. Timber land here can 
best accomplish the social ends of production through a policy 
which combines the cutting of the mature trees with the pres- 
ervation of the forest itself. It is partly for this reason that 
governments are everywhere retaining or adding to their forest 
lands, as in the United States with its numerous national forest 
reserves and occasional state parks ; while some countries even 
seek to control the action of private forest owners, in the 
effort to prevent denudation or to secure reforestation. 

In mineral lands the possibility of reproduction is excluded 
by the very nature of the case. The law of diminishing returns, 
however, is equally operative, even though its working is apt to 
be obscured. In some mines it becomes necessary to go deeper 
for an increased supply, with a resulting rise of cost which 
finally becomes prohibitive and leads to a complete cessation 

20 



306 Land. [§ 134 

of operations. Even where, as in the oil or diamond fields or 
in some coal or iron mines, the returns seem to be constant 
from year to year, we are in the presence of diminishing 
returns, for the source of the returns is itself being slowly 
consumed. At the end of a given period, be it short or long, 
not only will the returns abruptly stop, but the possibility of 
securing any further yield in the future will also have disap- 
peared. As was explained above, we must therefore abstract 
from each recurring return a sum which when capitalized at the 
rate of production will ultimately amount to the total original 
capital and replace the value of the initial stock. Translated 
into ordinary business language, we must allow for depreciation, 
— a depreciation which, when continued long enough, will 
entirely absorb the original capital. The life of the anthra- 
cite coal fields in Pennsylvania, for instance, is estimated, 
on the basis of the present rate of production, at between 
one and two hundred years ; and of the English coal fields 
at somewhat less. In the case of agricultural land, then, ad- 
ditional doses of capital or labor will yield a relatively smaller 
produce ; in the case of mines or badly managed forests the 
ostensible produce may be the same, but the real net return 
on the original unimpaired investment becomes constantly 
smaller. 

Even in the case of urban land the same law applies. The 
fertility, that is, the productive service, of certain lands con- 
sists in yielding support to buildings. It may indeed be 
profitable to replace a tent by a wooden shanty, a shanty by a 
stone house, and perhaps even a stone house by a steel sky- 
scraper. Obviously, however, at a given moment there will be 
a point beyond which a more expensive structure will not yield 
proportionate returns. 

134. Situation or Geographical Location of Land. 

The value of all production goods is derived, as we know, from 
that of the products or consumption goods. Oranges do not sell 
at higher prices than potatoes because the owner must pay 



§ 134] Location. 307 

more for orange lands than for potato lands ; on the contrary, 
orange lands cost more than potato lands because the oranges 
that can be grown on an acre sell for a larger sum than the 
potatoes that can be raised on the same area. Whether the land 
can be used for oranges rather than potatoes often depends as 
much on location as on fertility. The most fertile land may 
be so far removed from the market that, notwithstanding the 
great potential supply of the produce, the land will be value- 
less because there is no effective demand for its product. The 
mutations in value due to changes in situation are in modern 
times far greater than those due to changes in fertility. The 
fruitfulness of land is subject to the alternations of weather or 
chances of nature, but it may on the whole be kept fairly 
unimpaired with reasonable care, and may be increased up to 
a certain point by unremitting attention. The economic 
changes in situation, on the other hand, are often sudden, long- 
continued and unpredictable. The orange lands in Southern 
Italy have recently been ruined by the rapid introduction of 
California fruit into the Eastern market ; the wheat lands of 
England have suffered greatly during the last half-century by 
the opening up of vast stretches in the New World. Per 
contra, when the Erie Canal was completed the sections near 
the terminals appreciated enormously, and we have daily 
examples of the sudden rise of value in districts newly served 
by a railroad. 

These considerations apply to urban land as well. In the 
main, and especially when long periods are taken, the value of 
urban lands grows with the development of the city. Mere 
agglomeration of population does not involve an increase of 
land values, if, as in Naples to-day, the growth of population 
is accompanied by a lessening of business prosperity and there- 
fore by a diminution in the income of the consumer and 
tenant. But where numbers increase with prosperity, land 
values naturally rise. The mutations of situation, however, do 
not always result in an advance. Certain sections in Greater 
New York are to-day worth less than a few decades ago, 



308 Land. [§134 

because the tide of business or fashion has ebbed rather than 
flowed. The introduction of new trolleys or subways has 
advanced some sites but depreciated others. 

It is largely due to the element of situation that different 
classes of land are within certain limits capable of being 
transformed into each other. A diamond field can of course 
not yield a good rice crop, nor can rubber forest land ever be 
profitably utilized for oats. But pasture land may become 
wheat land, wheat may be supplanted by garden produce, and 
truck farms in turn may change into cheap suburban sections 
and finally into expensive business sites. From this point of 
view land possesses great mobility. In a certain physical sense 
land is fixed, while everything else is movable, — and this is 
the basis of the legal distinction between movables and im- 
movables. But in the economic sense land is mobile, and 
capital as opposed to land is immobile. A machine can best 
be used for a particular purpose, and is only rarely serviceable 
for anything else ; a piece of land can often serve any one of 
a large number of different uses. Any economic fact which 
brings about a relative change in situation confers mobility 
upon land. 

Since situation is such an important element in productivity, 
all changes which tend to diminish distance by bringing the 
producer and consumer together are a mark of progress. The 
previously existing sources of supply may fall in value, as in 
the case of the New England farms or the Italian orange groves, 
but the existing stock of wealth as a whole is increased by the 
reduction of cost. It is, however, important to remember that 
so far as the productivity of land is ascribable to situation, its 
rise in value is more and more due to its increasing contri- 
bution to the production of other things than the mere agri- 
cultural produce. An industrial enterprise is located in a city 
for the same reason as a workman or a lawyer : the greater 
expense of the land for the factory or the home is more than 
offset by the lower costs in other respects or by the expectation 
of higher returns. With the growth of industry and population 



§ 135] Cultivation. 309 

the productivity of land depends more and more on situation 
and relatively less on mere fertility. 

135. Cultivation of Land. 

So far as situation is concerned, the increase of productivity 
is solely a result of the progressive elimination of the costs of 
transportation. So far as fertility is concerned, a far larger 
field of activity is open to human ingenuity. The application 
of labor- to land is its cultivation. Agricultural products are 
commonly divided into fruits, roots, cereals and leguminous 
plants. Food-roots and cereal grasses are found in a state of 
nature, and their cultivation and improvement play somewhat 
the same role in progress as does the domestication of wild 
animals. There have been several important stages in agri- 
cultural development. 

(i) The first is the system of migratory agriculture or the 
shifting of the arable area. This is found at the outset in all 
countries where land is abundant and where the community 
is on the point of abandoning the hunting or the pastoral life. 
A particular plot is tilled for a season or two in the roughest 
manner, and when the soil begins to show evidences of 
deterioration the cultivators abandon the land and pass on to 
a fresh tract, perhaps to return to the first after a long time 
has intervened and restored its primitive fertility. Where the 
land is covered with forests, a clearing is made by fire, the 
ashes fertilizing the ground and the stumps being allowed to 
remain and rot. Because of this burning process, the system 
is also called essartage. Where the land is near the seashore 
seaweed, as in the American colonies, is frequently employed 
as fertilizer. 

Migratory agriculture was applied to both roots and cereals. 
Root culture generally precedes that of cereals, and no real 
civilization was ever based on root culture alone. In America, 
for instance, before the advent of the white man, the potato 
and the manioc gave way to maize, and where, as in Hayti, this 
was not the case, there was but slight progress. As Payne has 



3IO Land. [§ 135 

pointed out, cereal agriculture alone, among the forms of 
food- production, taxes, recompenses and stimulates labor and 
ingenuity in an equal degree. 

(2) The second stage is that of surface tillage or stationary 
agriculture. As the forests disappear or the supply of free 
land diminishes, the essartage or migratory system gives way 
to the more permanent occupation of a given area, and its 
periodical reduction to a state of tilth. Much of course 
depends on conditions of climate. In the Old World were 
found wild culminiferous grasses which made possible the 
cultivation of wheat, barley, oats, rye, millet and rice. In the 
New World, although other indigenous grains existed, the wild 
corn or maize soon became practically the only cultivated 
cereal. This, together with the fact that no important beasts 
of burden like the ox or the horse are found in historic times, 
goes far, as was remarked above, to explain the lower level 
of civilization reached by the Indians in Mexico or Peru, com- 
pared with the natives of Asia and Europe. Where the soil 
is composed of alluvial deposits or possesses great fertility for 
other reasons, the natural surface affords so abundant a yield 
that only very slight manuring is needed to furnish a practically 
continuous crop. Surface tillage may therefore also be called 
the one-crop system. When the land retains its fertility with 
little labor, and where there is a constant demand for the 
particular product, this one-crop system may persist for a long 
time. 

(3) Usually, however, some form of rest is found to im- 
prove the fertility of the land. We thus reach the third 
stage of what is best called alternating agriculture. That is, 
there is an alternation of crop and fallow, the same piece of 
land being cultivated one year, serving as a rough pasture 
the following year. At any given time, therefore, there are 
two fields, — one for the crop, one lying fallow. This is hence 
also called the two-field system. It was soon ascertained, 
however, that still better results could be attained by extend- 
ing the alternation to the crops as well, and we thus reach the 



§135] Cultivation. 311 

three-field system, the same field being devoted the first year 
to wheat, the second to oats, and lying fallow the third year. 
This system, which is found throughout mediaeval Europe, is 
also called the open-field or intermixed system, because the 
land was cultivated in narrow strips, each cultivator possessing 
one or more strips in different parts of the field, separated 
from the other strips not by any fence or hedge but only by 
small ridges or balks. 

(4) The fourth stage is reached when a substitute is found 
for the recurrent fallow or waste. This consists in so increas- 
ing the number and variety of the crops, and in such a skilful 
use of animal and mineral manures, that the fertility of the soil 
is kept practically constant without any fallow at all. This 
system is known as that of convertible husbandry, or in its still 
more developed stages as that of the rotation of crops or 
diversified farming. It involves the use in turn of cereal and 
root crops, and especially the application of artificial grasses 
like clover. In England, where the transition took place in 
the eighteenth century, it was also called the system of en- 
closures, because the method of separate strips was abolished, 
and the whole field was now cultivated in the same way, 
separated from the adjoining fields by a hedge or fence. 

The earlier systems of agriculture involve the use of much 
land and of comparatively little labor. They are hence called 
extensive systems. The greater the effort made to secure 
larger crops by economizing laud rather than labor, the 
nearer we approach the system of intensive farming. When it 
is found profitable to economize in labor rather than in land 
through the use of capital in the shape of farm machinery, we 
reach the most modern form of large-scale agriculture, which is 
usually termed capitalistic farming, and which will be discussed 
later. At any given period, however, extensive farming may 
be more economical than intensive farming. 

In the United States we find most of these phases. The 
period of essartage or forest clearing was soon followed by 
the surface tillage or one-crop system, which still prevails over 



312 Land. [§ 135 

a large part of the South. The open-field system, however, 
flourished only in very small sections of the East, because the 
rapid increase in wealth in the North and West rendered 
profitable the transition on the one hand to large-scale farming 
and on the other to the more intensive system of crop rota- 
tion. With the advance of prosperity the most effective use of 
the land leads to continual changes. In large sections of the 
East, for instance, the cultivation of cereals, with the possible 
exception of corn, has become unprofitable. The less fertile 
lands have been converted into permanent pasture, and the 
increase in the average fertility of plough and meadow lands 
coupled with the growth of forage crops and the use of 
the silo tends to diminish the relative amount of cultivated 
land. The process of transition culminates in the dairies and 
market-gardening farms of the thickly populated communities. 
Given liberty and intelligence, the farmer may be relied on to 
choose that form of tillage which is most profitable to him and 
most productive to the community. 



CHAPTER XXI. 
CAPITAL. 

136. References. 

J. B. Clark, Distribulion (1S99), chs. ix-xii ; F. A. Fetter, Principles 
(1904), ch. xviii; E. v. Bohm-Bawerk, /'t;j'///'z/(' Theory of Capital (1891), 
bk. ii, ch. ii; W. S. Jevons, Theory (18S8), ch. vii; T. N. Carver, Distri- 
bution (1904), ch. vi ; R. Mayo-Smith, Statistics and Economics (1895), 
ch. v; F. A. Walker, Political Economy (1888), part 2, ch. iii ; T. Veblen, 
Theory of Business Enterprise {1904), chs. ii, ix; A. Marshall, Principles 
(1898), bk. iv, ch. vii; A. T. Hadley, Ecojtomics (1896), ch. v; J. S. 
Nicholson, Principles (1893), bk. i, ch. vi, and Machinery and Wages 
(1892), chs. iv, v; H. Sidgwick, Principles (1883), bk. i, ch. v ; H. R. 
Seager, Introduction (1904), ch. vii; R. Giffen, Economic Inquiries (1904), 
part 2 ; W. P. Trowbridge, Report on Power and Machinery Employed in 
Manufactures (U.S. Tenth Census, Extra Volume, 188S) ; U. S. Twelfth 
Census, VII; United States Industrial Commission, Report, XIX (1902), 
514-544 ; J. B. Clark, Essentials of Economic Theory (1907), chs. xviii, x.x. 

137. Kinds of Capital. 

We have seen that capital in its broadest sense includes 
everything that has a capital value. The totality of capital 
is equivalent to the totality of wealth. Capital would then 
comprise three great categories : ( i ) consumption capital, or 
wealth which affords a benefit income, like food, jewels, books 
in the hand of the consumer; (2) lucrative or acquisitive 
capital, that is, any form of wealth including relations like the 
franchise of a corporation or the good-will of a business which 
gives a money income; (3) production capital, or concrete 
goods which are utilized to produce more goods. In treating 
of capital as an agent of production it is with this third aspect 
that we have to deal. From the point of view of progress, 
moreover, this is the important aspect, since the first condition 



314 Capital. [§137 

of progress is the increase of the concrete goods that consti- 
tute wealth. 

Capital in this sense can be further classified into land and 
other capital. If capital be regarded as either consumption 
or lucrative capital, there is no need for such a distinction. 
Whether a man enjoys an estate or a painting is immaterial, — 
neither can perhaps be duplicated as consumption capital. 
Whether he applies a fund of a given amount to the purchase 
of a farm or a share of stock is again immaterial, so far as each 
represents so much lucrative capital. But as an agent of pro- 
duction, land, as we have seen, stands in a relation socially so 
peculiar to the producer, and is moreover of such paramount 
importance when compared to any other single category of 
concrete goods, that it is best discussed by itself. 

Capital as an agent of production is sometimes classified as 
fixed and circulating capital. The original distinction of Adam 
Smith was that circulating capital comprised goods from which 
profits could be derived only by their circulating from hand to 
hand, like finished products, while fixed capital was that which, 
like a house, yielded a revenue without changing hands or cir- 
culating any further. As a matter of fact, however, the only 
kind of capital which circulates indefinitely is money ; in other 
cases, as when a product goes direct to the consumer, there 
may be only one change of hands. The great aim of modern 
enterprise, in fact, is to reduce the circulation to the narrow- 
est limits. 

Another way of explaining the distinction is to say that fixed 
capital comprises such things as can be used repeatedly for 
productive purposes without suffering much change ; and that 
circulating capital consists of things the single use of which 
would convert them from the category of production goods 
into that of consumption goods. A machine would be fixed 
capital ; the leather just before being converted into the shoe 
would be circulating capital. This is virtually the distinction 
between durable and perishable wealth. It is also sometimes 
expressed as a distinction between active and passive forms 



§ 137] Kinds of Capital. 315 

of capital, the active capital being the fixed capital which, like 
the machine, makes the impression, the passive capital being 
the circulating capital, which, like the leather, receives the 
impression. This nomenclature is less happy in that it ob- 
scures the fact that all forms of productive capital co-operate 
with each other, and in this sense are really active. 

Another classification of capital is that according to the 
uses to which it can be put, as agricultural, commercial, indus- 
trial and financial capital. 

( 1 ) By agricultural capital, strictly speaking, is meant some- 
thing different from land or landed capital. Agricultural 
capital is not land, but the things applied to the land ; land or 
landed capital is the ground itself. When we speak of a man 
putting his capital into land, we mean that he invests in a 
piece of land ; when we say that he applies capital to land, 
we mean that he spends his money on better farming tools or 
machines, manures, drains or beasts of burden. In the former 
case we would have land or landed capital ; in the latter we 
have agricultural capital. This distinction, however, is fre- 
quently not observed. 

(2) When the concrete pieces of capital take the form of 
ships, docks, warehouses or media of internal commerce, we 
speak of commercial capital. When capital is applied to the 
processes of industry in the narrower sense, we speak of indus- 
trial capital. From one point of view the same object may be 
regarded in turn as industrial, commercial or agricultural cap- 
ital. A cart may be constructed in a factory and then used in 
the industrial operations of another factory ; it may be em- 
ployed by a merchant, and may finally be sold to a farmer for 
use on the farm, serving in turn as industrial, commercial and 
agricultural capital. The characteristic feature of modern life 
is the increasing importance of industrial capital. 

(3) By financial capital is meant not so much the concrete 
objects as the fund or money embodiment of the agents used 
in financing or rendering possible economic enterprises. The 
surplus from any economic activity may be stored up in the 



3i6 Capital. [§ 133 

shape of jewelry or of coins ; and this surplus wealth is the 
financial capital which may at any monient be devoted to pro- 
ductive enterprise. In modern times the surplus is put not 
only into money, but into all kinds of paper and credit repre- 
sentatives. Financial capital on a large scale has been in turn 
a handmaid to each form of economic activity. In the later 
days of classic Rome financial capital was closely connected 
with land, the slaves being the important form of capital. In 
the developed economy of the Orient, as well as in the later 
middle ages, financial capital was intimately related to com- 
merce ; the bankers were the merchant princes. In modern 
times financial capital is more and more associated with in- 
dustry : the " industrials " are fast gaining even on the rail- 
way or banking securities. Modem capital is predominantly 
industrial capital. 

138. Function of Capital. 

The aim of all economic activity is to secure a surplus by 
augmenting utilities and diminishing costs. Production affects 
surplus in both ways, — it increases the stock of economic 
goods, or decreases the cost. Sometimes it accomplishes 
both results. Capital as an agent of production is an efficient 
help in this process. 

The productivity of capital consists in the aid which it ren- 
ders in securing the same results with less effort. It is an 
adjunct to human labor, and to that extent lessens labor by 
interposing something between labor and its result. The 
function of capital might therefore be called the roundabout 
method of production. If we need water, we can go to the 
stream each time and bring the water in our hand, or we can 
devote some of our labor to constructing a pump. While we 
are making the pump we are losing time and energ}^, but when 
it is finished there will soon be an appreciable net saving or 
surplus of utility over cost. Instead of applying our labor 
directly to the stream we interpose the piece of capital known 
as a pump. The pump not only pays for itself, but leaves a 



§ 138J Function of Capital. 317 

surplus, which can now be transmuted into further wealth. 
Capital, then, is productive in the same sense As labor. It is 
not indeed the cause of value any more than labor is the 
cause of value. But when labor brings about an increased 
net surplus of utility, we call it productive ; and when capital 
does the same, it also is productive. If the pump does not 
work, that is, does not increase the surplus, it will have no 
value, neither rental value nor capital value ; and since it has no 
capital value it will not form a part of the aggregate of things 
which are represented by the fund of capital. But if it does 
work, that is, if it is really capital, it is productive because it 
produces a net surplus over and above what would have been 
produced by unaided labor. 

The statement that capital works through the roundabout 
method of production is, however, liable to misunderstanding. 
In one sense indeed the interposition of capital lengthens the 
period of production. In former days the cobbler made the 
shoe or the blacksmith the chain, and turned it over almost at 
once to the consumer ; nowadays a long period intervenes be- 
tween starting the manufacture of a particular shoe or chain 
and its final delivery to the consumer. The process of the 
successive combination and division of labor has been brought 
to its highest efficiency by the employment of capital. Capital 
is needed for securing the raw material in large quantities, for 
providing the factory or mill and the machinery, for the pay- 
ment of the various classes of laborers, for the warehousing of 
the product and for its distribution to the retailer. The greater 
the participation of capital, the more roundabout is the process. 

On the other hand, a single process or a definite part of 
a process can obviously be finished far more rapidly by a 
machine. The substitution of capital for labor, that is, the 
replacement of a hand by a machine, means the cutting down 
of the time of technical production. We thus seem to face 
the dilemma that capital saves time and loses time, that it 
shortens the period of the particular process and yet lengthens 
the period of the entire process. 



3i8 Capital. [§ 13S 

The reconciliation is simple. The individual machine saves 
time, but to create the machine takes time, so that the whole 
process, counting from the beginning is lengthened. The 
machine is prcxluctive because it turns out so much more in 
quantity that the value of the entire product soon yields a 
surplus over the expenditure of energy put into the machine. 
That is, from the point of view of aggregate mass production 
there is a saving of time, measured in terms of cost ; from the 
point of view of the single product there is a sacrifice of time, 
which is more than offset by the fact that the single product is 
now only an insignificant unit in the mass. The value of the 
unit is a proportionate part of the mass. 

In another sense, finally, the ascription of the roundabout 
process to capital may be reversed. If we regard not the 
particular piece of capital, but the fund of capital in general, 
we may, on the contrary, say that capital brings labor and con- 
sumption together. In a large shoe factory, for instance, it 
takes time to make each shoe ; but at any given moment the 
raw material is coming in at one end and the shoe is finished 
at the other end. Formerly the cobbler made one shoe and 
then began on another ; now at the same instant shoes are 
begun and shoes are finished. The function of capital as a 
productive fund is therefore really to synchronize labor and 
consumption. The individual pieces of capital separate labor 
and consumption ; the fund of capital brings them together. 
They are two aspects of the same thing, just as division of 
labor and combination of labor, seemingly the opposites, are, 
as we know, really two sides of the same process. To give a 
familiar illustration, it is like the reservoir of water used to run 
a mill ; the individual drops come in at one end and go out 
at the other, but the water remains at the same level and 
exerts its force as a mass of united drops. The individual 
pieces of capital form the final enjoyment ; capital as a whole 
permanently invested unites them. In one sense capital in- 
volves a roundabout or individual process ; in another sense 
it implies the most direct of processes. 



§ 139J Creation and Growth of Capital. 319 

139. Creation and Gro-wth of Capital.* 

The root idea in the conception of capital is that of a 
surplus. In order for anything to have a capital value there 
must be a surplus of inchoate uses. If the fibre in an electric 
light bulb wears out, the bulb possesses no further reserve uses 
and loses its capital value. Again, if we labor simply to pro- 
vide for our fleeting wants and consume all that we produce, 
there remains at the close of each production period no 
surplus. The surplus energy which is transmuted into pieces 
of capital therefore comes ultimately from the decision of the 
individual to postpone present gratifications. If instead of 
taking the water directly from the stream we elect to spend 
our time in constructing a pump, we are creating a piece of 
capital. The only way in which capital can be formed is at 
bottom by saving, by waiting, by forbearing. 

The creation of new capital is therefore the result of pru- 
dence and forethought. The habit of saving, that is, of subor- 
dinating the present to the future, is an essential characteristic 
of progress. Primitive peoples are spendthrift, — they have 
no thought of the morrow and lay by nothing. There is no 
accumulation of capital. Where the provision of immediate 
needs occupies the whole of one's time, there is no opportunity 
of developing those higher qualities that make for civilization. 
The formation of a continually growing surplus involves the 
saving of energy and the liberation of human efforts from the 
pressing needs of mere material existence. The growth of 
capital means the advance of civilization, because it implies 
more efficient labor, the growth of leisure and the freedom 
to turn attention to the scientific, aesthetic and ethical aims of 
life. The destruction of capital, as in the later days of the 
Roman empire, spells a decay of civilization, because with the 
weakening of the economic foundation the whole superstruc- 
ture is bound to fall. The growth of capital is in itself indeed 
not sufficient to engender the highest form of civilization, but 
it is a fundamental prerequisite. Not all wealthy communities 



320 Capital. [§ 139 

have been civilized in the best sense, but there has never been 
great art, great Hterature, or great science except when there 
has been an abundance of capital. 

To say that capital is the result of saving or forbearance does 
not necessarily imply any moral approbation of the owner of 
capital. It is for this reason that it is unwise to speak, as many 
do, of abstinence or sacrifice as the cause of capital growth. 
A man who already possesses an income large enough to satisfy 
his daily wants, be they great or small, cannot do anything else 
with his surplus except to save it, and thus lead to the forma- 
tion of fresh capital. If he is a maniac, he can of course 
physically destroy it or the money represented by it ; and if he 
is a fool, he can put the capital to such stupid and unproductive 
uses that it will soon become worthless and disappear as an 
embodiment of value. But unless he wastes capital in these 
crude ways, he cannot help saving. He does not abstain from 
any present gratification, because this capital is a surplus above 
all present gratifications. Abstinence here means abstinence 
from senseless waste ; it is a negative, not a positive, merit. 
Nor does he sacrifice anything. As we shall see later in dis- 
cussing the question of interest, the problem is one of marginal 
forbearance, that is, of sacrifice at the margin where he must 
choose between consumption and saving. The richer a man 
is, the more remote is the margin where he will have to decide. 
The saving of one dollar means something very different to a 
millionaire and to a day laborer. The essential point to re- 
member is that capital is a surplus, and that the stock of capital 
can be augmented only by an excess of production over con- 
sumption. The excess can be formed only by forbearance 
or postponement, but the forbearance is based on the expecta- 
tion of increased income. There is no ethical merit attach- 
ing to the individual, although the social consequences are 
advantageous. 

It might be objected, finally, that if we buy a railway share or 
a, piece of land which doubles in value during the year, there 
is an increase of capital without any waiting. In reality, how- 



§ i4o] Nature and Intiuence. 321 

ever, the share rises in value because it represents an increased 
earning capacity, owing to the fact that the railway is now 
doing more business, that is, adding more value to the com- 
modities it transports, or, m other words, creating surplus 
wealth. If the corporation elected to waste the surplus by 
squandering it in extravagant salaries or palatial private 
cars there would be no excess available for dividends, and no 
rise in the price of the security. In the same way the in- 
crease in the value of the land means that there are more 
individuals who have accumulated capital and who either need 
the land themselves or employ the other human beings that 
are thus enabled to pay for the use of the land. In every case 
the increase of capital, that is, the creation of fresh capital 
or capital value, implies an increased productivity, or a sur- 
plus somewhere. Whether the individual owner of capital is 
always entitled to the particular surplus is quite another 
question. 

Capital, then, is the available stock of existing wealth. If a 
part of this stock is consumed and not replaced, capital is 
diminished ; if it is not only replaced, but so used as to bring 
about an increase, this surplus is the new capital. The only 
way to increase capital is to refrain from the waste or immedi- 
ate consumption of product. The greater the existing stock of 
capital, the easier is it for the individual or the community to 
make this election. The increase of capital is therefore in last 
resort due to the growth of intelligence. Where science gives 
an increasing mastery over nature, the problem of production 
through the growth of capital resolves itself into the intelligent 
selection of such things as are wanted by society, that is, to the 
formation of a constantly growing surplus of wealth. 

140. Nature and Influence of Capital. 

Capital, as a socially important factor, is to-day, as we have 
seen, industrial capital. Ours is called the capitalist age, not 
because capital was unknown before, but because industry is 
permeated through and through with capitalist qualities. Capi- 



322 Capital. [§ 140 

tal on a small scale, consisting of a little surplus, was devoted 
to production almost from the beginning of civilization. Cap- 
ital on a large scale was amassed in the agricultural and 
commercial enterprises of antiquity. Under the economic 
conditions which made for slavery and handicrafts, however, 
there was no opportunity to employ capital on a large scale in 
industry ; and with the decreasing profitableness of slavery and 
the gradual restriction of the commercial frontier, as in later 
Rome, capital itself began to dwindle until the whole economic 
and political structure collapsed. 

After many centuries, capital was again accumulated, first 
out of the surplus of mediaeval agriculture, and then at a more 
rapid rate out of the profits of the new commerce. The open- 
ing up of the world market in the eighteenth century made 
possible the application of this surplus to industry. From that 
time begins the prodigious increase of capital which charac- 
terizes modern life. Now for the first time the real productive 
force of capital is realized. The surface of the earth is a fixed 
quantity ; a commerce based on agriculture and the products 
of hand labor can never transcend certain well-defined bounds. 
But the multiplication of commodities into the value of which 
the raw materials enter as a minor factor is limited only by our 
failure to unlock the mysteries of nature. Modern science, 
modern technique, modern capital, are enabling us to explore 
the innermost recesses of this unknown world and to convert 
it to industrial uses. 

Modern capital is therefore primarily industrial capital, and 
since the factory is the type of modern industry, the capitalist 
system may be called the factory system. There is indeed 
also a capitalist agriculture, but the characteristic features of 
this are borrowed from capitalist industry. Industrial capital 
may be taken as the type. 

The factory system is sometimes called the machine system. 
This is not strictly correct. In a modern chemical factory, for 
instance, there may be few or no machines at all. What must 
always be present, however, in a factory is some form of auto- 



§ i4o] Nature and Influence. 323 

matic action, replacing hand labor, whether that action is due 
to forces of nature operating directly upon raw materials, or 
indirectly through the medium of a machine. For all practi- 
cal purposes, however, the machine may be regarded as the 
type. 

Industrial capital in this sense discloses three characteris- 
tics, — mass production, uniformity and interchangeability. 

(i) Capital becomes profitable only when there is a mass 
production. The supersession of hand by machine labor 
involves such an enormous multiplication of output that the 
product must now be sold en masse. The cotton print will 
ultimately go to the individual consumer, but the factory 
owner must count upon the wholesaler taking his entire prod- 
uct of a day, a week or a season. Even if the factory owner 
retails the goods, as for instance with the Tobacco Trust or 
certain shoe-dealers, he must control enough shops to take his 
whole output. 

(2) Industrial capital implies uniformity of production. 
Hand labor gives free rein to the individuality of the pro- 
ducer ; each pair of shoes the cobbler turns out may differ in 
some respect from its predecessor, and may be prized on that 
account. A machine turns out the same thing day after day, 
and the advantages of specialization and co-operation are de- 
rived chiefly from this continual repetition. Things are made 
according to fixed types, forms or standards. Hence there is 
sometimes used the term standardization of industry. What is 
meant is the uniformity, — the uniform repetition and pro- 
duction of the same type. Great as has been the ingenuity 
expended in differentiating machinery, the result has been only 
a moderate multiplication of types, but little differentiation of 
the individual products within each type. There are indeed 
different kinds of hats and keys, but one Knox hat is almost 
like another, and one Yale key almost like its thousands of 
fellows. 

(3) Industrial capital also denotes interchangeability. Capi- 
talist division of labor means that all complex products are 



324 Capital. [§ 141 

made in minute portions. Through the very fact of uniformity, 
one unit is as good as another of the same class, and may be 
used interchangeably. If some particular thing breaks in a 
bicycle or a locomotive, it can be duplicated at once and at a 
minimum of cost. The system of interchangeable parts is 
applied to-day even to such products as vast bridges and co- 
lossal steamers. Interchangeability is a corollary of uniformity 
and of mass production.^ 

The deeper social influence of capital is visible in these 
characteristics. Modern life means greater uniformity. We 
dress alike, we eat alike, we speak alike, we think alike. 
Through capital we are becoming citizens of the world. 
Old prejudices are destroyed at every turn, religious and 
racial antipathies diminish, local and even national boundaries 
are overstepped. Side by side with these advantages appear 
the dangers. The levelling is undoubted, but if not carefully 
guarded against it may become a levelling down instead of 
up. Uniformity is preferable to eccentricity and vagaries, 
but a uniformity of mediocrity is to be deprecated. The real 
hope and strength of the factory system are that industrial 
capital will so reduce cost and increase the surplus of the in- 
dividual as to enable him to devote it to the higher ends 
which make for progress. 

141. Investment of Capital. 

When we speak of the investment or application of capital, 
we mean in last resort the utilization of the concrete things 
that constitute capital. These concrete things will be used by 
the alert entrepreneur only as long as they yield the maximum 
returns ; whenever something new promises better results, it will 
be forthwith substituted. Perhaps the most striking fact in the 
incipient lawsuit of a few years ago between the great iron- 

1 This is explained in all its details in the Tenth Census Report on 
Power and Machinery by Professor Trowbridge, who classifies machine 
tools into those acting by compression, shearing, paring, milling, abrad- 
ing, grinding and sawing. 



§ i4i] Investment of Capital. 325 

masters, Carnegie and Frick, was the revelation of the readi- 
ness with which the former threw into the scrap heap machinery 
almost new, costing millions, as soon as a notable improvement 
had been perfected. This seeming destruction of capital on an 
immense scale was in reality an increase, profitable alike to the 
producer and the public. All physical investment of capital is 
the application of new commodities to replace the old. The old 
need not be actually worn out ; it is sufficient that it should 
have lost its relative productivity. 

Under modern business conditions the investment of capital 
is put back a stage, and becomes the financial investment, 
which renders possible the ultimate physical utilization. Cap- 
ital is invested as a fund, to be later transmuted into concrete 
things. Herein lies the significance of the modern corpora- 
tion. Through the medium of corporate securities a fund of 
capital is made mobile and active. The purchase by the 
public of a new industrial security means, if the enterprise is 
honestly and ably financed, that the proceeds will ultimately 
take the shape of plant or working capital, that is, of realized 
earning capacity. The function of the promoter, the banker 
and the underwriting syndicate is at bottom legitimate and 
productive. If the physical investment of capital is desirable, 
the financial machinery through which this end is attained is 
similarly productive. It often requires far more ability to raise 
the necessary funds at the lowest rate than to turn out the 
finished product at the lowest cost. Both investor and con- 
sumer may in the end derive more benefit from the successful 
financial " deal " than from the best technical operation of the 
industry. The control of modern finance over vast masses of 
capital indeed makes possible its manipulation for illegitimate 
ends on a gigantic scale. But these abuses must not blind us 
to the essentially productive character of the services of the 
financiers as the intermediaries between financial and indus- 
trial capital. 

Since the ownership of the concrete pieces of capital is 
coming more and more to be represented by these corporate 



326 Capital. [§ 141 

securities, their character becomes of considerable importance. 
Technically they are divisible into stocks and bonds. The 
share of stock represents legally the proportionate part of the 
corporation which owns the corporate assets. When there 
are no bonds, the stock is entitled to all the profits. Fre- 
quently the stock is divided into preferred and common shares, 
the former sometimes being a cumulative stock, so called 
because if dividends are passed they accumulate and must be 
paid subsequently before the common stock receives anything. 
Opposed to the stock is the bond ; the property of the corpora- 
tion is mortgaged to the bondholders, who receive interest on 
the bond until the expiration of the mortgage. If there is any 
default in the interest, the property covered by the mortgage 
can be sold to satisfy the debt. In England, where mortgage 
bonds are unknown, their place is taken by the debenture 
stock, the difference being that the holder has the right, in 
case of default, to reimburse himself by levying upon some 
item of the company's property. Bonds are first, second, 
third or further mortgage bonds according to the priority of 
the lien. Where a rate of interest is contingent upon earnings, 
the bond is an income bond. Sometimes the bonds are 
convertible into stock, and hence called convertible bonds. 
When smaller corporations are merged into a larger one or 
when a corporation seeks to avoid mortgaging its own prop- 
erty, the original bonds are put in trust as collateral, and 
a new issue is made under the name of collateral trust 
bonds or simply trust bonds. Although such an issue is 
not technically a mortgage on the real estate, it is so prac- 
tically, since recourse can always be had through foreclosure 
to the underlying mortgage securities. 

In legal theory the stock represents the ownership, and the 
bond a limited interest in the enterprise. In actual fact, under 
recent financial development, where the original cost or outlay 
is often defrayed out of the proceeds of the mortgage indebt- 
edness, the stock has come to represent the speculative interest 
in the venture, while the bond represents the actual proprietor- 



§ i4i] Investment of Capital. 327 

ship. This economic reversal of the legal situation is most 
clearly marked in the railways, but is also visible in ordinary 
industrial enterprises. As a consequence there has frequently 
developed an antagonism of interest, not only between bond- 
holder and stockholder, but also between the main body of 
investors and the directorate. In some States the issue of 
bonds is restricted to a proportion of the stock or of the prop- 
erty, or otherwise limited ; in other cases the bondholders are 
given voting power; in still other instances the principle of 
minority representation is introduced to safeguard the interests 
of the stockholders. The English law of 1900 and the recent 
Massachusetts law are perhaps the most advanced examples 
of Anglo-Saxon legislation to protect the varying interests of 
different classes of investors. 

The proper method of managing the investment in vast cor- 
porate enterprises has assumed such importance that it has well- 
nigh become a separate discipline, under the name of corporate 
finance. It includes such topics as accounting, the issue and 
marketing of securities, the funding policy, the accumulation of 
surplus and reserves, and many more. In a comprehensive 
treatise on economics these would all need explanation. They 
must here be passed over with a mere mention. The influence 
of the proper investment of capital is by no means confined to 
the investor. Primarily indeed he seems to be affected. He 
must, however, be regarded as the channel through which 
society as a whole increases its fund of capital and its resulting 
control of nature. The investor, as opposed to the reckless 
speculator, is as effectively an agent of society as any individ- 
ual producer. The one, like the other, may think that he is 
pursuing his own interest, but he will generally also be sub- 
serving the common interest. If the producer turns out some- 
thing that the community really wants, he will benefit society 
as well as himself; if the investor exercises sagacity in the ap- 
plication and control of his investment, he will tend to save 
the community the risk of misdirected energy and the wastes 
of failure. 



328 Capital. [§ 141 

The proper financial control of the fund of capital is no less 
important than the proper application of the concrete pieces 
of capital to industry, trade or agriculture. Upon the econo- 
mic investment of capital, in the broadest sense, depends in 
large measure the prosperity of all classes. 



CHAPTER XXII. 
ENTERPRISE — THE CONCENTRATION OF PRODUCTION 

142. References. 

W. Z. Ripley (ed.), Trusts, Pools and Corporations (1905) ; J. W. Jenks, 
The Trust Problem (1900); R. T. Ely, Monopolies and Trusts (1900); 
H. W. Macrosty, Trusts and the State (1901), and The Trust Movement 
in British Industry (1907) ; J. Moody, The Truth about the Ttists (1904) ; 
J. E. Le Rossignol, Monopolies, Past and Present ([901); J. B. Clark, 
Control of Trusts (1901); A. Marshall, Principles of Economics (1898), 
bk. iv, chs. X, xi ; E. S. Meade, Trust Finance (1903), ch. iii ; National 
Conference on Trusts (1908); United States Twelfth Census, VII Sum- 
mary and Analysis of Results (\()Oo); United States Industrial Commis- 
sion, Report, I, II, XVIII, XIX, 595-722; Ida Tarbell, History of the 
Standard Oil Company (2 vols., 1904) ; H. R. Mussey, Combination in 
the Mi7iin!:; Industry (Columbia Studies, XXIII, 1905) ; M. Jacobstein, 
The Tobacco Industty in the United States (Ibid., XXVI, 1907); A. Ber- 
glund, The United States Steel Corporation (Ibid., XXVII, 1907); G. H. 
Montague, The Rise atid Progress of the Standard Oil Company (1903); 
H. W. Quaintance, Influence of Farm Machinery on Production and Labor 
(Am. Econ. Assoc. Publications, 3d series, V, 1904) ; Trusts and Trade Com- 
binations in Europe (United States Consular Reports, 1900); F. Walker, 
The Law concer}iino Monopolistic Combinations in Continental Europe (Pol. 
Sci. Quart., XX, 1905) ; Bureau of Corporation Reports on the Beef, Petro- 
leum and Tobacco Industries (190 5-1 910). 

143. The Meaning of Concentration. 

Enterprise is in one sense, as we have seen (§ 121), a spe- 
cies of labor. In reality, however, it has come to mean that 
kind of labor which is carried on independently instead of for 
a stipulated reward. Strictly speaking, it is not identical with 
management, for the manager of a business may be hired at a 
definite salary. Enterprise is management plus risk ; that is, 
it involves the independent conduct of a business, with all the 

329 



330 Enterprise. [§ 143 

chances of profit or loss. We have already discussed the his- 
torical forms of enterprise (Chap. VI). In modern times the 
pre-eminent fact of business enterprise is the tendency to 
concentration. A study of modern business enterprise thus 
becomes virtually a study of concentration. 

In approaching the problem of concentration, we must 
distinguish between the concentration of wealth, the concen- 
tration of production and the monopoly of production. Con- 
centration of wealth is essentially an individual phenomenon 
in the sense that any one may acquire wealth from indepen- 
dent and relatively insignificant sources. A rich landlord may 
own a large number of small tracts ; a wealthy capitalist may 
secure his returns from many investments in minor enterprises. 
Concentration of production, on the other hand, means either 
that the units themselves are increasing in size as in the case 
of larger farms or factories, or that they are combined with 
other units under more or less centralized management, as in 
the case of enterprises technically separate, but subject to the 
same financial control. Where an individual owns the produc- 
tive factors, concentrated production involves concentrated 
wealth ; where the business enterprise assumes a corporate 
form, concentrated production is compatible with a diffusion 
of wealth among the security holders. 

Concentration of production, again, is not necessarily a mo- 
nopoly of production. The size of the units may increase, but 
there may still be rivalry between them. Bonanza farms, 
department stores and great corporations, each representing an 
undoubted concentration of production, may yet suffer keen 
competition from their rivals. It is only when concentration 
has reached the stage where a single business enterprise per- 
manently supplies so large a percentage of the entire output 
as to control the price that we can speak of a virtual monopoly. 
In such a case indeed there may be technical competitors, but 
the competition is practically inoperative. 

Concentration of production may be predicated of each of 
the three factors, — labor, land and capital. 



§ 144] Large-Scale Production. 331 

( 1 ) The concentration of labor as an independent phe- 
nomenon is not important. After a certain low limit of co- 
operation has been reached the profitableness of an increased 
force of laborers depends on the acquisition of more land or 
the utilization of more capital. Not only must wages be ad- 
vanced, but the output must be disposed of. For these and 
similar purposes capital is required. Concentration of labor 
is thus dependent upon concentration of land or of capital. 

(2) Concentration of land varies with the kind of land. In 
grazing and agricultural land, modern economic forces, as we 
shall see (§ 145) are opposed to concentration ; so far as it exists, 
it rests upon the application of capital to land. In mineral and 
forest lands, when we observe a tendency toward concentration 
it will often be found that as in the case of iron, coal and cop- 
per, the product forms an important raw material for closely 
related industries, and that the land concentration is a result of 
the industrial concentration. Finally, in urban lands, whether 
the sites are owned in large or in small plots has no bearing 
on the price. Thus, while the concentration of land may be 
important in distribution, it is as a factor in production either 
non-existent, insignificant or dependent on that of capital. 

(3) Concentration of production hence resolves itself into 
concentration of capital as the dominating force. Of this, 
again, there are two categories, — large-scale production in the 
narrower sense and capitalist consolidation and integration in 
the wider sense. Large-scale production is the result of the 
change in the normal business unit brought about directly by 
modern machinery. Capitalist consolidation and integration 
are the result of the more important changes effected by the 
application of great masses of financial capital to industry and 
commerce in general. Each of these must be considered in 
turn. 

144. Large-Scale Production. 

Large-scale production might also be called the concentra- 
tion of employment. It means that the business unit, whether a 
manufacturing establishment, a commercial enterprise or a farm, 



332 Enterprise. [§ 144 

employs a large amount of capital, and as a consequence in some 
cases also a large amount of labor or land. The ordinary ex- 
ample is that of the modern factory contrasted with the shop or 
handicraft system of former times. We find isolated instances 
of large-scale industrial production in earlier ages, but with the 
advent of machinery it has become the type instead of the 
exception. Beginning in the textile industries in England at 
the close of the eighteenth century, it soon spread to the most 
important trades, although there still exist to-day industries in 
which an unequal contest is being waged between the domes- 
tic and the factory systems. On the European continent the 
transition came somewhat later, and in Germany to-day the 
so-called petty industry (Kleinbetrieb) still makes a respectable 
showing. In the United States, although we find a beginning 
of large-scale industry in the textiles after the war of 1812, it 
was not until after 1850 that the transition from the hand 
trades assumed any importance, and not until after the civil 
war that the tendency toward concentration into large estab- 
lishments became very marked. 

The distinction between small-scale and large-scale produc- 
tion is not precisely equivalent to that between hand trades 
and manufactures. The building trades are generally put in 
the former category, and yet they are often conducted on a 
large scale. On the other hand the factory may be a small 
one. Out of 512,254 establishments reported in the Twelfth 
Census, 215,814 represented hand trades. In 32,382 of these 
from 5 to 20 persons and in 7,773 over 20 persons were em- 
ployed. On the other hand, out of 296,440 establishments, 
in about one-seventh (41,687) the proprietor was the only 
workman, and in about one-half of the remainder (125,890) 
the number of employees was under 5. Nevertheless large- 
scale production may be declared to be virtually the result of 
the factory system with its use of machinery, its mass produc- 
tion and its standardization. In most of the hand trades, like 
carpentry, plumbing, custom tailoring and custom boot-making, 
we have a small-scale production; while the building trades 



144] Large-Scale Production. 



333 



which form the chief exception are nowadays, through the use 
of machinery, the purchase en masse of raw materials, and the 
employment of large capitals and great numbers of workmen, 
in reality more akin to the factory system. While many small 
factories are still being continually started, the tide is setting 
strongly toward an increase in the size of the unit. 

In the United States the maximum number of manufactur- 
ing establishments in many branches was reached in 1870; 
since that time the number has been in some cases actually 
diminished, while in all cases the average capital invested, the 
number of employees and the value of the product per unit 
have steadily risen. The following table illustrates the great 
increase of large-scale production : 



Industries. 


Number of 
Establish- 
ments. 






Average per Establishment. 




Number of 
Workmen. 


Value of Product. 


1870. 


1900. 


1870. 


1900. 


1870. 


1900. 


1870. 


1900. 


Iron and Steel . . 
Agricultural Im- 
plements . . . 
Carpets and Rugs 
Woollen Goods . 
Leather 


726 

2,076 

215 

2,8gi 

7.569 


668 

7>5 

133 

1,035 

1,306 


$161,523 

16,780 

58,329 

34,184 

8,076 


$858,371 

220,571 
334,205 
120,180 
I3',2i4 


103 

12 

56 
28 

5 


133 

65 
214 

67 
40 


$274,878 

25,080 
101,217 
53,755 
20,774 


$1,203,545 

141,549 
362,349 
114,425 
156.231 



This method of presentation of averages fails to show the real 
significance of the change, as it includes the small as well as the 
large factories. If, however, the number of workmen is taken 
as an evidence of concentration, it appears that a little over 
eight per cent of all the factories reporting employ about 
seventy-five per cent of the total number of workmen. In a 
single iron and steel mill in Ohio there were 7,477 employees; 
in a cotton mill in New Hampshire, 7,268 ; in an agricultural 
implement factory in Illinois, 6,728; in an electrical supply 
factory in Pennsylvania, 6,318 workmen. Moreover, as ap- 
pears from the preceding table, the investment of capital and 
the value of the output increase far more rapidly than the 
number of workmen. The head of a steel company in Pitts- 



334 Enterprise. [§ 145 

burg recently testified that in order to construct, equip and 
manage a steel plant there is needed an investment of from 
twenty to thirty millions of dollars. 

145. Large-Scale Agriculture. 

Where agriculture depends chiefly on the labor of the farmer, 
aided by comparatively primitive implements, the size limit of 
profitable farming is soon reached. In the middle ages, even 
with co-operative or communal farming, the prevalence of the 
three-field system restricted the size of individual strips. In 
more modern times we find either the small plots of the 
European peasant proprietor or the somewhat larger tracts of 
fresher land of the early American farmer. 

Farming on a large scale becomes possible only when capi- 
talist methods are employed. In former times these methods 
were supplied by slavery, as in the latifundia of later repub- 
lican Rome and in the ante-bellum plantation in the South. 
The slave, however, was to all intents and purposes a species 
of capital or machinery — even though a human machine. 
When slavery disappeared, a new era of small farms was 
ushered in, and whatever tendency to large-scale farming is 
found to-day is due in great measure to the application of 
industrial capital in the shape of farm machinery and capital- 
ist methods of transportation. 

The home of farm machinery is in the United States. Its 
coming was somewhat later than in the case of the other more 
important productive enterprises. Whitney's cotton gin and 
Newbold's cast-iron plough were invented at the close of the 
eighteenth century, but it is only since the civil war that farm 
machinery has been used on a large scale. The increase in 
the production of agricultural implements in the United States 
is, illustrated by the following figures : 1850,^6,842,611; i860, 
$20,831,904; 1890,^81,271,651; 1900,1101,207,428. 

In the large farms of the far West fifty-horse-power traction 
engines are now used to pull at one season a train of great 
ploughs, harrows and press drills for planting, and at another 



§ 145] Large-Scale Agriculture. 



335 



immense harvesting-machines, automatic rakers and threshers. 
In the Central states we find check-row planters, riding- ploughs, 
steam corn huskers and shelters, mowing-machines, potato 
planters and diggers, manure-spreaders, feed-choppers and 
grinders and ditch-digging machines — to mention only a few 
of the newer implements. The saving of labor, the prodigious 
increase of output and the lessening of cost go far to explain 
the competition of American farm products in the European 
markets, despite the great obstacle of distance. 

The influence of machinery in increasing wages, shortening 
hours of work, lightening the tasks of women and children and 
raising the general standard of life of the farmer as well as of 
his hands is so universally recognized that it needs no statisti- 
cal proof or explanation. What interests us here is its effect 
upon the size of farms. 

It is obvious that considered by itself expensive machinery 
becomes profitable only when applied to large stretches of land. 
This is evident from the following table giving the average 
number of acres of improved land per farm : 





1850. 


i860. 


1870. 


1880. 


1890. 


I goo. 


United States .... 


78.0 


79.8 


71.0 


71.0 


78..I 


72.3 


North Atlantic Division 


693 


69.0 


68.3 


66.6 


643 


574 


South Atlantic Division 


120.9 


1 1 5.6 


80.7 


56.1 


,SS-6 


47-9 


North Central Division 


61.0 


67.7 


69.7 


80.6 


95-8 


101.2 


South Central Division 


82.6 


89.7 


6c.8 


56.2 


61.0 


48.^ 


Western Division . . 


51.8 


106.4 


1 68. 1 


185.9 


157-8 


111.8 



In the North Central division, the chief home of farm 
machinery, the increase is marked. The average for the whole 
country, however, is kept down by two facts. First, in the 
Southern states machines outside of the cotton gin have 
hitherto been found well-nigh inapplicable, and the old slave 
plantations have been gradually broken up. Secondly and more 
important, land values tend to rise with growing prosperity, 



33^ 



Enterprise. 



[§ MS 



A given capital thus represents a constantly diminishing acre- 
age, and it becomes increasingly profitable to apply more 
labor and minor machines to small areas rather than large 
capital and vast machines to great areas. That is, we have a 
tendency to more intensive rather than large-scale farming. 
The final consequence is a resultant between the two forces of 
growing productivity of machinery and the increase of land 
values. 

The following table gives the average size of the entire farm 
in acres : 





1850. 


i860. 


1870. 


1880. 


1890. 


rgoo. 


United States .... 


202.6 


199.2 


IS3-3 


133-7 


136-5 


146.6 


North Atlantic Division 


1 1 2.6 


108.1 


104.3 


97-7 


95-3 


96.5 


South Atlantic Division 


376.4 


3S2.8 


241. 1 


157-4 


133-6 


108.4 


North Central Division 


143-3 


1397 


123.7 


121.9 


133-4 


144-5 


South Central Division 


291.0 


321-3 


194.4 


150.6 


144.0 


iSS-4 


Western Division . . 


694.9 


366.9 


336-4 


312.9 


324.1 


386.1 



It will be observed that up to 1880 there was a movement 
toward smaller farms. Since 1880, the era of the introduction 
of machinery on a large scale, the forces have about balanced 
each other in the North Atlantic and South Central divisions, 
while in the South Atlantic division the tendency just referred 
to has been progressing, even though during the past few years 
there seems to be a new and sUght movement toward the so- 
called plantation system, or large farm with white owner and 
extensive gangs of negro farm hands. In both the North 
Central and Western divisions not only has the use of machin- 
ery increased, but the opening up of vast stretches of graz- 
ing land has contributed to increase the average size of the 
farms. With the growing importance of land values the trend 
in the West may be expected soon to conform to that in the 
East. In 1900 over 82 per cent of all the farms were under 
1 75 acres. The tendency for the small farms to increase is 
shown by the following table of percentage in acres : 



§ 146] Consolidation and Integration. 337 





Under lo. 


10-20. 


20-50. 


50-100. 


100-500. 


500-1000. 


1000 and 
over. 


1880 


3-5 


71 


19s 


25-8 


42.3 


1.9 


0.7 


1890 


3-3 


5.8 


19.8 


24.6 


44.0 


1.9 


0.7 


1900 


4-7 


6-3 


21.9 


23.8 


39-9 


1.8 


0.8 



The same movement is discernible even in the Western and 
North Central divisions, where, notwithstanding a slight increase 
in the largest farms, there has been a considerably greater 
increase in the smaller farms. The conclusion is that large- 
scale production is, even in the United States, far less appli- 
cable to agriculture than to industry, chiefly because the lower 
cost resulting everywhere from machinery is in the case of 
agriculture partly counterbalanced by the increase in land 
values and the consequent changes in cultivation. 

146. Consolidation and Integration of Production. 

Side by side with the immediate effects of machinery in 
enlarging the size of the individual business unit, we have the 
broader phenomenon of the capitalistic combination of produc- 
tion. This is of two kinds : first, the consolidation of like units 
into a larger whole, as in the union of separate shipping lines 
into the International Marine Company ; and second, the inte- 
gration of unlike units, as the union of such originally different 
enterprises as mines, transportation companies, factories and 
mills into the United States Steel Corporation. 

Combinations of capital have gone through several phases 
known respectively as agreements, pools and trusts, each being 
further divisible into two or more classes. 

(i) The earliest form is the agreement of independent 
concerns to fix prices. This is the first natural effort to in- 
crease profits by restricting competition. It is found almost 
from the beginning of business enterprise. Its obvious weak- 
nesses are the lack of any adequate penalty to prevent under- 
cutting by any one of the parties to the agreement ; and the 



338 Enterprise. [§ 146 

inducement which the ensuing high profits hold out to new 
competitors. In the American railway business this plan, 
whether in the form of the earlier traffic arrangements or in 
that of the more recent presidents' agreements, never proved 
effectual. In general industry its efficacy is limited and 
doubtful. 

(2) The next step is the agreement to divide the field, 
each enterprise contracting to limit its activity to a particular 
section. This plan also is subject to difficulties except in cases 
where the first comer possesses undoubted advantages through 
the mere fact of priority. The most familiar examples are the 
American express companies and the French railways, although 
even here there is some competition on the fringe of each 
field. Division of the field, however, is in most cases only a 
stage in the formation of a closer union, as in the so-called 
rival gas or electric light companies. 

(3) The third phase is the pool, or the attempt to restrict 
the output rather than the price or the field. The pool is so 
named because the receipts are put into a common fund or 
pool, each member of the combination having an allotted per- 
centage of production.^ Ordinarily this takes the form of a 
money pool, the excess or deficiency in each case being paid 
in cash. Occasionally, as in some of the railway traffic-pools, 
the output itself is diverted from one member to another. 
When this apportionment is accomplished by secret favors to 
individuals, like the cattle, hog and oil " eveners," the abuses 
become notorious. Frequently the equilibrium is brought 
about by a fine on the excess production, instead of a technical 
pooling of the output or the proceeds. Here, again, the 
temptations covertly or openly to exceed the allotment in 
order to secure greater immediate profits or to furnish an argu- 
ment for a larger percentage at the next distribution is fre- 
quently too strong to be resisted. To this danger the whisky 
pool, the beam pool and many others succumbed. 

1 The industrial pool must not be confused with the financial pool, 
used for speculative purposes in the stock exchange. 



§ 146] Consolidation and Integration. 339 

(4) Sometimes the pool combines both features, the fix- 
ing of price as well as of output. Occasionally it goes still 
further and under the name of selling bureau or agency 
constitutes a fourth phase. The selling bureau not only fixes 
prices and output, but often manages the entire business of 
selling, taking all orders and distributing the respective allot- 
ments to each member. Many of the German Cartells are of 
this nature, although in some cases they are nothing but ordi- 
nary pools. Of the same character was the Michigan Salt 
Association, and many of the French cornptoirs or syndicats. 
The weakness of the pooling arrangements is not only their 
instability, but also the fact that in Anglo-Saxon countries at 
least their provisions are unenforceable because repugnant to 
the common law. 

(5) The fifth stage was reached in 1882 by the formation 
of the Standard Oil Trust, so called because the constituent 
enterprises turned over their business to a board of central 
trustees, receiving in return trust certificates and abandoning to 
the "trust" the entire operation of the business.^ Although 
the whisky, the sugar and other trusts rapidly followed, the 
scheme was soon found to conflict with the law, the original 
trusts were dissolved, and the constituent enterprises were now 
combined in a new and still more effective way. 

(6) The sixth form may be called the holding corporation. 
The original members of the combination are first organized 
as corporations, each maintaining its separate existence. A 
new central corporation is then formed to buy up or hold the 
stock, or at least a majority interest, of the individual corpora- 
tions. On the basis of the income received from the constit- 
uent companies, the parent corporation issues its securities, and 
while each plant or business is operated as a separate unit, its 
capacity is virtually controlled by the directory of the parent 
company. It is the trust in a new and more effective form, 
preserving the unity of the old, but adding a certain flexibility 

1 The industrial trust must not be confused with the trust company, 
any more than the industrial pool with the stock exchange pool. 



340 Enterprise. [§147 

and responsibility. In its original form something like the 
holding corporation is found in isolated instances in an earlier 
period, as in the case of the Pennsylvania Company in 1870, 
the Bell Telephone Company in 1880 and the Southern Pacific 
Company in 1884. All these, however, were organized under 
special laws ; the general legality of one corporation holding 
the stock of another was first made possible by the New 
Jersey Corporation Act of 1889. This led to a sudden out- 
burst of activity in the formation of holding companies. Of 
this character are the United States Steel Corporation of 1901, 
the American Tobacco Company of 1904 and most of the 
newer combinations. The attempt to apply the same method 
to railways in the case of the Northern Securities Company 
failed because of special prohibitive legislation ; but even here 
the same result is likely to be brought about through the so- 
called system of community of interests whereby the identical 
directors virtually possess a controlling voice in the man- 
agement of each constituent company. This system of com- 
munity of interests, as it is already found in some of our great, 
financial institutions, where separate companies are controlled 
by the same individuals, may well prove to be the next step in 
a still greater combination of capitalist production. 

, 147. Growth of Combination. 

Combination of capital, as is obvious from the illustrations 
of the last section, has made itself manifest in four business 
groups: (i) the railroads; (2) the franchise or public service 
enterprises, including the telegraph, the telephone and the 
so-called municipal monopolies like water, gas and electric 
light, street railway, heating and conduit companies; (3) 
the trust companies in the narrower sense, the banks and the 
insurance companies ; (4) the industrial combinations. The 
first three groups are so important in themselves and so clearly 
marked off from the others that they will be more appropri- 
ately discussed below. We shall confine our attention here 
to the industrial combinations. 



§ 147] Growth of Combination. 341 

The advantages of such combinations from the point of 
view of the producers are obvious. Large savings are possible 
in advertising and in travelUng agents. The avoidance of cross 
freights by locating the estabhshments at different places is 
often of importance, especially in the case of heavy or bulky 
articles. The benefits of division of labor and large-scale pro- 
duction may be multiplied by concentrating departments and 
facilitating standardization by devoting each factory or mill to 
one particular product. The larger the concentration, the bet- 
ter are likely to be the knowledge and control of credit rela- 
tions, so as to reduce the loss from bad debts. Again, more 
ample means are afforded to secure capacity of the highest order 
in the management of the enterprise. Finally, the wider view 
which comes from an interchange of ideas and a comparison of 
experimental methods in the separate plants is frequently of 
value. The president of the American Tobacco Company a few 
years ago declared this to be the chief benefit of combination. 

The immediate causes of consolidation are various. It may, 
as in the railways or the sugar trust, be due to a realization of 
the folly of " cut-throat" competition ; it may, as in the iron 
mines, be owing to the lower prices which render necessary the 
application of better methods to insure lower cost ; it may be 
the result of a long period of depression which has almost 
eliminated profits. But at bottom combination is due to the 
economy of production that comes from concentrated capital. 
The immense profits often secured by the promoters may 
indeed be responsible for premature or dishonest consolida- 
tions, but such mere speculative projects are obviously short- 
lived. Unless there are some real advantages in the combi- 
nation it cannot endure ; the mere fact of its continued and 
prosperous existence justifies its formation. 

The concentration of production is so general and world- 
wide a tendency that the attempt to trace it to any minor 
cause is useless. Combinations are sometimes ascribed to the 
tariff or to discriminations in railway charges. That these 
exert some influence in particular cases is more than probable, 



342 Enterprise. [§ M7 

but that they serve in themselves to explain the facts of com- 
bination is unlikely. Trusts and pools abound in the European 
countries where the tariffs are low or even non-existent. 
Freight discriminations are found in America, but are un- 
known in Germany ; yet industrial combinations are well-nigh 
as common there as here. Whatever may be the contributing 
causes, the fundamental reason is clearly the economy of 
concentrated production. It is only in recent years that in- 
dustrial capital has become so abundant as to disclose the real 
advantages of concentration. 

According to the census of 1900 there were 185 combi- 
nations, representing 2,040 plants and turning out products to 
the value of ^1,667,350, a little over 14 per cent of the total 
industrial output of the United States. But since 1900 the 
movement has progressed rapidly. In 1900 there were 16 
combinations each with a capital of over ^50,000,000 and 
with an aggregate capital of $1,231,000,000. In 1909, as 
appears from the table opposite, not only were there 30 such 
combinations with an aggregate capital three times as great 
($4,020,000,000), but a single combination now had a larger 
capital than the 16 combinations, and about one-half as large 
as all the 185 combinations in 1900. 

The United States Steel Corporation is such a striking 
example not only of the consoHdation, but of the integration 
of production, that the following figures are appended. The 
assets of this corporation in 1902 were, according to the 
testimony of its president in a recent lawsuit,^ as follows : 

Iron and Bessemer ore properties $700,000,000 

Plants, mills, machinery, etc 300,000,000 

Coal and coke fields 100,000,000 

Railroads, ships, etc 80,000,000 

Blast furnaces 48,000,000 

Natural gas fields 20,000,000 

Limestone properties 4,000,000 

Cash and cash assets 148,281,000 

$1,400,281,000 
1 Hodge et al. vs. U. S. Steel Corporation. 



§ 147] 



Growth of Combination. 



343 



In the seventh annual report of Dec. 31, 1908, the assets had 
grown to $1,746,017,532. Contrasted with this integration of 
unlike industries, we have the consolidation of like industries 
shown below. The ten (in 1909 thirteen) subsidiary com- 



Name. 


Founded 
or Reor- 
ganized. 


Outstanding 

Stock and 
Bonds, 1909. 


1. United States Steel Corporation . . . 

2. American Tobacco Company .... 

3. American Smelting & Refining Co. . 

4. International Mercantile Marine Co. . 

5. Amalgamated Copper Co 

6. International Harvester Co 

7. Central Leather Co 

8. Lackawanna Steel Co 

9. Pullman Co 

10. Standard Oil Co 


1901 
1904 

1905 
1902 
1899 
1902 

1905 
1892 
1867 
1899 
1892 

1903 
1891 
1906 
1901 

1903 
1899 
1902 
1899 
1885 
1907 
1899 

1895 
1899 
1906 
1903 
1898 
1898 
1901 
1902 


$1,393,172,000 

230,569,500 

177,000,000 

175,961,200 

153,880,000 

120,000,000 

108,328,002 

103,901,400 

100,000,000 

98,338,300 

92,198,000 

91,380,400 

90,000,000 

87,118,100 

82,466,000 

79,325,500 

78,880,400 

73,504,477 
70,501,100 
65,000,000 
60,483,000 
60,000,000 
57,984,400 
57,876,900 
57,709,941 
57,281,966 
54,770,000 
54,040,500 
53,000,000 
50,000,000 


11. United States Rubber Co 

12. Mackay Companies 

13. American Sugar Refining Co 

14. Corn Products Refining Co 

15 American Can Co. 


16. Colorado Fuel and Iron Co 

17. Pittsburgh Coal Co 


18. Westinghouse Electric Co 

19. American Woolen Co 

20. Swift & Co 


21. Commonwealth Edison Co 

22. American Car & Foundry Co. . . . 

23. Virginia-Carolina Chemical Co. . . . 

24. Republic Iron and Steel Co 

25. Distillers Securities Corporation . . . 

26. Dupont de Nemours Powder Co. . . 

27. International Paper Co 

28. National Biscuit Co 

29. American Locomotive Co 

30. United Copper Co 



panies (the Carnegie, the Illinois, and the Lorain Steel Com- 
panies, the American Steel and Wire Company, the National 
and the Shelby Steel Tube Companies, the American Sheet 
Steel, American Tin Plate, American Bridge and Union Steel 
Companies), themselves the results of many consolidations, 



344 Enterprise. [§ 148 

represented in 1903 86 blast furnaces, 31 Bessemer and open- 
hearth steel works, 57 blooming, slabbing, billet and sheet 
bar mills, 20 rail and plate mills, 251 puddling furnaces, 39 
skelp mills, 59 bar, hoop and cotton tie mills, 11 structural 
shape works, 24 rod mills, 22 wire mills, 447 sheet, black 
plate and tin plate mills, 5 tube mills, 26 bridge and structural 
plants, 24 foundries and 16 miscellaneous works. 



148. Effects of Combination. 

The effects of combination may be regarded from the five- 
fold standpoint of the owner, the wage-earner, the independent 
producer, the purveyor of the raw material and the consumer. 

(i) The owner in modern times is the corporate investor. 
So far as the problem is one of general corporate profits 
depending on the ordinary mutations of business, it will be 
discussed in the next book. So far as the profits are affected 
by the capitalization of the enterprise, it has already been 
touched upon. The surest protection of the innocent investor 
is to be sought, as we have seen, through the avenue of pub- 
licity and responsibility. 

(2) The influence of industrial combination upon the wage- 
earner is to accentuate the general effect of capital upon wages, 
to be studied hereafter. So far as the prosperity of the laborers 
is bound up with the general productivity of the enterprise, the 
industrial combination which tends toward greater stability and 
enlarged productivity may work toward an improvement in 
their condition. To this may be opposed the consideration 
that the mere fact of concentration may enable the enterprise 
to present a more solid and effectual front to the demands of 
the trades-unions. On the other hand, the dangers of a strike 
are multiplied when it extends through all the ramifications of 
avast trust. Finally, the far-sighted heads of a great combi- 
nation are apt to take a broader view of the labor problem, 
and to seek industrial peace by wise concessions and a policy 



§■ 148] Effects of Combination. 345 

of making the worker realize that his interests are in a large 
sense bound up with those of the combination. The American 
Federation of Labor has declared unequivocally that as a body 
of workmen it has no objection to the trusts. Yet when the 
combination becomes a monopoly, there is, as we shall see, 
a real and insidious lurking danger in its ultimate effects upon 
wages. 

(3) The independent producer is undoubtedly assailed by 
the combination. We must, however, distinguish between the 
legitimate and illegitimate, the natural and unnatural effects of 
combination. Where the combination wins its way by better 
service to the public, the disappearance of the inefficient small 
competitor may be as advantageous to the community as was 
the substitution of the factory for the sweat-shop or the railway 
for the coach. Even for the individual himself, as long as he 
is not pre-eminently capable, it may often be better to be an 
official of a huge enterprise on a fairly secure salary and with 
prospect of advance than an independent producer continually 
on the fringe of defeat, in much the same way as the " in- 
dependent " hand-loom weavers in England and America were 
glad to join the ranks of the factory operatives. To rid the 
community of the inefficient producer and to convert him into 
a useful agent may be the beneficial result of combination. 

This, however, presupposes that the way is kept open for 
the efficient. In other words, combination ought not to be 
permitted to assume the form of monopoly, except in those 
quasi-public enterprises where competition is itself undesirable. 
The " unfair " means through which it is attempted to shut 
off rivalry are factor's agreements, so-called predatory compe- 
tition and freight discrimination. The factor's agreements are 
arrangements whereby retailers are induced through various 
favors not to handle competitive goods. Predatory competi- . 
tion is the temporary cut in prices only at. those points and at 
those periods when competition is threatened. Both these 
practices, however, are a part of ordinary competitive business 
usage. In competition, indeed, the benefit of the lower price 



34^ Enterprise. [§ 148 

ultimately inures to the consumer ; in monopoly it accrues to 
the producer. Yet since the practices themselves are irrespec- 
tive of the nature of the business, it is perhaps open to question 
whether any effective means of successfully checking them can 
be devised. On the other hand, the secret rebates granted 
by the railroads are undoubtedly as remediable as they are un- 
justifiable. Combination turns into monopoly largely through 
railway discrimination. How far monopoly actually ensues 
will be discussed below. 

(4) So far as the purveyor of raw material is concerned, 
much is supposed to depend upon the percentage of the 
output taken by the combination. Where the business is only 
one degree removed from the raw material of nature, and 
especially where the supply of this material is restricted, the 
tendency to concentrate the ownership of the raw material 
becomes, very strong. It is significant that most of the largest 
combinations on the list in page 343 have grown out of an 
ownership of raw material which is not annually reproducible, 
like iron ore, copper and lead. In several cases, however, 
like oil, tobacco, sugar and beef, the combination does not 
own the raw material, because it is the result of annual pro- 
duction at once too minute and too widespread for concen- 
tration. In these and similar cases the complaint is often 
heard that the trust keeps down the price of the raw material 
by reducing its offer to the lowest limit. While there un- 
doubtedly is some foundation for this charge, as especially in 
the recent history of the Beef Trust and of the Standard Oil 
Trust in Kansas, it is probable that the statements are fre- 
quently exaggerated. For in some cases, as in tobacco and 
sugar, the market is an international one, and even if the 
combination forms so large a part of the international demand 
as to control the price, the restriction of the offer below the 
cost of the marginal producer would have the effect of reducing 
the supply and thus ultimately leading to an increased price. 
As long as the total demand for the raw material suffers no 
appreciable change, it is questionable whether the concentra- 



§ 149] Limits of Combination. 347 

tion of demand into a few hands is apt to have a permanent 
effect on the producer of the raw material. Nevertheless the 
temporary consequences may be burdensome and injurious. 

(5) Finally, the influence of the combination upon the 
consumer shows itself chiefly in the selling price. The advan- 
tage of combination is lower cost, but the object of combination 
is higher profits. It does not necessarily follow that higher 
profits mean, as is usually supposed, actually higher prices. 
If the demand can be stimulated by a reduction of price, 
higher profits are compatible with greater sales at lower prices. 
There is in every industry, competitive or monopolistic, an 
obvious limit to high price, caused by the possible substitution 
of some lower-priced equivalent. This commodity competition 
is omnipresent. The real problem, however, is whether in 
those combinations which produce so large a share of the 
output as effectually to control the market, the " trust " price 
is higher than would be the competitive price. A careful 
investigation into some of the leading combinations by the 
Industrial Commission disclosed the fact that during selected 
periods when the combinations were actually in control, the 
"differential " or margin between the price of the raw material 
and of the finished product had risen, even though the actual 
selling price might have declined. The problem thus resolves 
itself into the question : does the combination tend to become 
a monopoly? 

149. Limits of Combination. 

It is clear that if there were no limit to combination, the 
logical result in every industry would be a monopoly of pro- 
duction. As a matter of fact, however, there are two classes 
of limits, natural and artificial. 

(i) The natural limit of combination is the persistence of 
competition. In certain branches this limit does not exist, 
and ought not to exist. In the railroad business the objec- 
tion to competition is that it leads to discrimination. In the 
other public-service corporations competition might do more 



34^ Enterprise. [§ 149 

harm than good. Competing telephones would be a source of 
lasting confusion to the patrons, competing gas and water com- 
panies a continual annoyance to the users of the streets. In 
some other branches of industry monopolistic combination is 
undesirable but none the less probable. As we have just seen, 
where the industry is concerned with, or based upon, masses 
of raw material found in a state of nature but in limited quan- 
tities and in specially favored locations, the control of the 
natural monopoly is apt to lead to a monopolistic combination 
of the business. In ordinary business, however, where the raw 
material is itself either a manufactured product or procurable 
under competitive conditions, the natural limits to combina- 
tion are more obvious. In the absence of legal or natural 
monopoly, whenever profits are high enough to tempt compe- 
tition, new-comers are likely to appear. The combination may 
swallow up the new competitor, but as long as science remains 
free, and the combination does not control the government or 
the general media of transportation, the process will repeat 
itself. The so-called " economic wastes " of competition are 
a cheap price to pay for its many advantages. Thus, while the 
United States Steel Corporation is constantly expanding, new 
competing corporations have been growing equally fast or even 
faster. Instead of a single combination, we have in each 
branch the looser concentration known as the pool, which has 
to be readjusted whenever a new competitor appears. At the 
close of 1904, after the Lackawanna Steel Corporation decided 
to make steel rails, the percentages of the Steel Rail Associa- 
tion were at once changed, and the arbitrator apportioned the 
output among the five members, — the United States, the 
Lackawanna, the Pennsylvania, the Cambria and the Maryland 
Steel companies. So in another .domain of business, like the 
great department stores in our cities, there is no way of keep- 
ing out not only the large competitors, but the small competi- 
tors as well. Indeed the erection of these mammoth stores 
has not appreciably diminished the number of little shops. 
Again, there are whole fields of industry where combination 



[§ 149 Limits of Combination. 349 

is only slightly applicable. In the woollen trades, in the shoe 
factories, in the cotton and silk mills, as well as in numberless 
other industries, the combinations are apt to be short-lived or 
partial. Finally, in the immense domain of agricultural pro- 
duction the possibility of combination is almost entirely 
eliminated. 

(2) The artificial limit of combination takes the shape of 
legislative restrictions. When this is not in harmony with the 
natural limit, its efficacy is small. It can at best only change 
the form of the combination. Thus the anti-pooling provision 
of the Interstate Commerce Law of 1887, and the Sherman 
Act of 1890, have been alike powerless to prevent the continu- 
ance in their essential features of the railroad pools and asso- 
ciations. The numberless Anti-Trust state laws have resulted 
in a change of form, not in a cessation of consolidation. We 
are only slowly awakening to the fact that what is needed is 
regulation rather than prohibition. In Europe the govern- 
ments have long since recognized the futility of rigid prohibi- 
tions, and are now concerned chiefly with attempts at moderate 
control. 

Most of the methods usually proposed to curtail combina- 
tions are ineffectual. The power of taxation may be invoked, 
but the higher tax on the great combinations can be evaded by 
reconstitution into apparently loosely united and legally sep- 
arate units. The limitation of profits has been tried, but with 
equal lack of success, owing to the facility with which profits 
may be apportioned in other ways than dividends and in 
other channels than the shares of the parent company. The 
prohibition of demanding various prices at different places is 
practically inoperative. The limitation of charges has hitherto 
been feasible chiefly in such public-service corporations where 
the conditions of cost remain fairly constant. The reduction 
of the tarifT, while doubtless desirable in particular instances 
like the tin plate industry, where monopolies have been shel- 
tered under the tariff wall, is open to the objection that unless 
most carefully carried out it is liable to destroy the industry 



350 Enterprise. [§ 149 

as well as the combination, or, at all events, to injure the small 
producer equally with the large one. The assumption of the 
enterprise by the government is a last resort, far beyond the 
province of probable American policy. 

It appears, then, that the methods of regulation most prom- 
ising of success are the maintenance of equality in transporta- 
tion and the securing of a reasonable publicity in the formation 
and conduct of the enterprise. These objects, as well as the 
removal of factitious advantages, once accomplished, the natu- 
ural limits of combination will disclose themselves ; and com- 
bination will turn into monopoly chiefly in those industries 
where monopoly itself is desirable. Evidently, however, in 
such cases the monopoly must be controlled, or, in last resort, 
managed by government itself. Where the natural regulation 
of competition is completely shut out, it must be supplanted 
by the artificial regulation of government. But where publicity 
and equality are preserved, the community may expect, in the 
vast mass of private industry, to reap the benefits of combina- 
tion without suffering the burdens of monopoly. The practical 
policy of the future must rest upon a detailed analysis of the 
various classes of industry, — where combination is possible 
without monopoly, and where, on the other hand, monopoly 
itself must be frankly recognized and held in check. 



Book III. 
Value and Distribution. 



CHAPTER XXIII. 

PROFITS. 

150. References. 



J. B. Clark, Distribution (1899), ch. xiii ; N. G. Pierson, Principles 
(1902), part I, ch. v; F. A. Walker, Political Economy (1888), part 4, ch. 
iv; and The Wages Question (1876), ch. xiv ; A. T. YididA^-^, Economics 
(1896), chs. iv, ix ; A. Marshall, Principles (1898), bk. vi, chs. vi, vii ; 
T. N. Carver, Distribution (1904), ch. vii ; F. A. Fetter, Principles (1904), 
ch. xxxi; J. S. Nicholson, Principles (1893-1901), bk. ii, ch. xiii, and bk. 
iv, ch. vi ; A. W. Flux, Principles (1904), ch. x; T. Veblen, Theory 0/ 
Business Enterprise (1904), chs. vi, x; H. R. Seager, Introduction (1904), 
ch.s. X, xi ; F. B. Hawley, Enterprise and the Productive Process (1907)', 
1 1. C. Emery, Speculation in the Stock arid Produce Exchange of the United 
States {i8g6), Place of the Speculator in the Theory of Distribution (1900), 
Legislation against Futures (Pol. Sci. Quart., X, 1895), and The German 
Exchange Act (Pol. Sci. Quart., X, 1895, and XIII, 1898) ; A. C. Stevens, 
Futures in the Wheat Market (Quart. Jour. Econ., II, 1888), and The 
Utility of Speculation (Pol. Sci. Quart., VII, 1892) ; H. Stokes, Busitiess 
in Futures (Econ. Rev., VIII, 189S); S. J. Chapman and D. Knoop, 
Anticipations in the Cotton Market (Econ. Jour., XIV, 1904) ; R. Giffen, 
Stock Exchange Securities (1877) ; A. Crump, Theory of Stock Exchange 
Speculation (2d ed., 1874). 

151. The Shares in Distribution. 

All wealth that is created in society finds its way to the 
final disposition of the individual through certain channels or 
sources of income. This process is called distribution, and 

351 



352 Profits. [§151 

the shares in distribution differ not only in amount but in 
Icind. 

Distribution, like production, is a social phenomenon. If 
every one consumed what he individually produced, there would 
be no exchange, no price, no distribution. In production we 
study the creation of the social income ; in distribution we 
study its division. In the one case we regard it as the na- 
tional output, in the other as the national dividend. In produc- 
tion we deal with the cost or expense of the factors which 
co-operate to create wealth ; in distribution we deal with their 
remuneration. It is clear that the shares in distribution differ 
according to the character of production and the structure of 
economic life. Where, for instance, slavery exists, we cannot 
speak of wages ; where the same individuals own the capital 
and do the manual work, we cannot well distinguish between 
profits and wages; where capital is not loaned, interest' does 
not emerge. The modern science of economics is, as we have 
learned, due to the efforts to analyze the modern shares in 
distribution. 

The study of distribution is primarily a study of the remu- 
neration of the factors of production. Since each factor con- 
tributes to the common result known as the social income, 
there must be a certain part of the product traceable to each 
factor. There are hence as many shares in distribution as 
there are factors in production. The remuneration of labor is 
called wages. The remuneration of the fund of capital is 
called interest. The remuneration of the concrete things 
that possess a capital value is called rent. Rent is usually 
limited to the return from land ; but since other things as well 
as land are rented, it is better, as we shall see, to call the re- 
muneration of land land-rent or ground-rent in contradis- 
tinction to other rents. Finally, the remuneration of the 
entrepreneur, or the man who carries on the enterprise, is 
called profits. Among them, wages, interest or rent, and 
profits exhaust the entire social income. 

In modern society differentiation of function has proceeded 



§ 152] Ordinary Profits. 353 

to the extent that different classes control different ageijts of 
production. This separation, however, is not rigid. The same 
man may own land and factories ; he may be a workman and a 
stockholder in the same plant, as in the United States Steel 
Corporation ; he may be a farm-laborer and a tenant or a 
land-owner ; he may be a money-lender and yet be actively 
engaged in industry, commerce or agriculture. In the great 
mass of cases, however, the social class corresponds to a dis- 
tinct kind of income, and in its broadest aspect the social 
shares in distribution correspond to the factors of production. 

152. Ordinary Profits. 

Profits are the income from business enterprise. They are 
not necessarily limited to capital. An employment agency or 
an Italian padrone may make profits from directing labor into 
the right channel. A real-estate operator may make profits 
out of selling land. Profits are a result of business enterprise, 
and the entrepreneur may deal in labor, in land, in capital or 
in all three. It is hence inexact to speak only of the profits 
of capital. 

The best method of gaining an insight into the nature of 
profits is to consider, first, ordinary profits. By ordinary profits 
are meant the profits of a regular business that deals in a repe- 
tition of analogous transactions in competition with others. 
The term normal profits that is sometimes employed is less 
satisfactory, because it incorrectly implies that there is such 
a thing as a normal or general rate of profits, as well as because 
it brings to mind the conception of normal value ; whereas 
profits are a result of fluctuations in market value and would 
not exist in a state of normal equilibrium. 

Profits are always a surplus. They are the difference between 
the cost of production or acquisition and the selling price. 
They form a differential, however, in a second sense. Profits 
are the surplus of the intramarginal over the marginal pro- 
ducer. At any given time, under competitive conditions, 
market price is the same (p. 234), but cost varies. The ex- 

23 



354 Profits. [§ is« 

penses of production are manifold, but may ordinarily be 
classified into cost of raw material, wages, rent, interest on 
tlie capital borrowed or invested, taxes and miscellaneous out- 
lays like insurance, advertisements and transportation expenses. 
All of these obviously vary from individual to individual. Some 
will display more care in the selection and arrangement of 
their labor force ; some will choose a more advantageous situa- 
tion, with a saving in both rent and transportation ; some will 
accomplish better results with less capital and economize in 
interest as well as taxes ; some will exercise more ingenuity in 
purchasing the raw material or securing a market. At the 
bottom of the scale is the marginal producer, working under 
the least favorable circumstances, and who can nevertheless get 
no more for his goods. With him price equals cost ; with the 
others price exceeds cost. The excess of price over cost 
constitutes profits. 

It is evident that in the long run profits could not exist in a 
state of normal equiHbrium. If there were no change in the 
general conditions affecting value — if, in other words, economic 
forces were in equilibrium and society quiescent in all respects 
save the existence of such a complete mobility of capital and 
labor as is implied in the idea of frictionless competition, — 
there could be no permanent profit to any producer. The 
gross earnings or gross profits would indeed include interest on 
capital invested ; for if the business man did not earn interest 
on his capital, he would go out of business and loan his capital 
at the normal rate to some one else. So also the gross earnings 
would suffice to give him a bare compensation for his services, 
for if not he would enter some other employment or become a 
wage-earner. Gross profits must include interest and wages. 
But there would be no net profits, or surplus profits, or profits 
in the real sense of the word. For as soon as a profit appeared 
the entrepreneurs in other fields who were just making ex- 
penses would at once bid against each other in their eftbrt to 
secure capital and labor, until they would capture their share 
of the market, and the profits would dissipate themselves on 



§ 152] Ordinary Profits. 355 

the one hand in the higher rate paid for the factors of pro- 
duction, and on the other hand in the lower price of the 
product due to the greater supply. What was added in one 
industry would be subtracted from another. In actual life, 
however, there is a continual change, — population varies, 
wants are modified, capital increases, the processes of industry 
and methods of enterprise alter. Competitive profits are due 
wholly to such changes. He who can take advantage of the 
market secures the gain. 

Profits, again, are necessarily unstable. They last only as 
long as the economic fluctuation or variation from the normal 
condition continues. A new invention is the source of profit 
because it reduces cost ; but when the patent expires and 
competition sets in, the influx of new producers will reduce 
the price to the new cost level and the profit will disappear. 
The profits may accrue for a time to individual producers or 
to the whole class of producers. When general demand aug- 
ments or, as in common parlance, when times are good and 
sales brisk, every one may make money. The increased 
profits, however, will lead to greater production, and the rela- 
tion between consumption and production will soon change, 
so as to usher in the " bad times " and a disappearance of 
profits. This rhythmic succession of inflation and depression 
will be studied later. Here it is desired to call attention to 
the fact that profits can last only as long as the economic dis- 
harmony or perturbation lasts, that is, as long as the forces are 
not in equilibrium. If the manufacturer continually introduces 
new inventions, he may retain his superiority over his compet- 
itors. If the demand of the community grows by leaps and 
bounds, it may keep ahead of the new production and for a 
long period afford profits to all producers. This may be true 
of a particular commodity or of a whole group of enterprises. 
At one period in the United States the shipping trade was 
particularly remunerative, at another the railroad industry, and 
so on. In a new section the supply of capital and labor may 
be so scarce that all business is lucrative ; and the increase in 



356 Profits. [§ 152 

population may cause agricultural profits to grow and land 
values hence to rise. In an old country the general political 
and commercial relations may be such as to afford a growing 
foreign market, with the possibility of large and long-continued 
profits to the domestic producer. In every case, however, as 
soon as the original force has spent itself and competition has 
set in, the profit tends to vanish. 

In this sense, and in this sense only, is it true that profits 
tend either to an equality or to a minimum. The older writers 
confused interest with profit. Interest is the return from the 
fund of capital ; profits are the return from the conduct of 
business enterprise, irrespective of whether the enterprise deals 
with capital or labor or both. Interest is a part of cost ; 
profit is a surplus above cost. Interest, as we shall see, has a 
normal rate ; profits may have an average rate but no normal 
rate. The marginal producer earns no profits ; the intra- 
marginal producers make profits which vary with the discrep- 
ancy of their cost from the market price. If in any businesses 
indeed profits are particularly high, the more efficient pro- 
ducers in other lines will transfer their capital to these occupa- 
tions ; but in these occupations, as in the others, the competitive 
profits will range from zero to large figures. If there is any 
equality, it is an equality of an average between much and 
nothing. On the other hand, while the tendency to an equal- 
ity is true of average profits — which is of importance only as 
between occupations — the tendency of profits to a minimum 
is true of each particular occupation. There is under normal 
conditions of progress a tendency in the rate of interest to fall, 
but, as we shall see, never to vanish ; there is under competi- 
tive conditions always a tendency for the rate of profits in 
each individual business to disappear. 

Thus in ordinary enterprises profit is the great lure of 
energy, and competition the great destroyer of profit. Com- 
petitive profits, the union of both, are hence the symptom of 
progress. They can exist only by being continually renewed ; 
they are not a tax on the community, but a draft on nature. 



§ 153] Aleatory Profits. 357 

Profits are a result of price, not a cause of price. Production 
at a lower cost creates profits ; competition forces price down 
to lower cost and eliminates profits. Profits can be main- 
tained only by the creation of a continually newer cost level 
lower than the new price. 

153. Aleatory Profits. 

Profits are sometimes described as the wages of superin- 
tendence. There are indeed certain occupations where the 
income partakes of the nature of wages. The commissions of 
a broker, like the fees of a professional man, are really wages, 
even though they are popularly called profits. Wages, how- 
ever, differ from profits in that wages are a stipulated income 
and profits a residual income. There is a normal rate of 
■wages, there is no normal rate of profits. Wages are a part of 
cost, profits a surplus over cost. The entrepreneur may think 
that he deserves a return for his services, but whether he 
secures one depends on his competitors. There is always a 
certain level below which wages cannot fall, because no work 
would otherwise be done ; but the very continuance of com- 
petitive profits depends on the abler producer cutting down 
cost to the point where the marginal producer earns no profits. 
The reduction of some wages to zero implies the starvation of 
the laborer and the crippling of the productive force of the 
community ; the reduction of some profits to zero means the 
elimination of the inefficient and the continuance of progress. 
Above all, profits differ from wages in that profits are the direct 
result of price fluctuations. The question thus arises as to the 
dependence of profits upon chance. 

Aleatory or chance profits exist in varying degree. Some 
are essentially unique or sporadic. If I find a pocket-book on 
the street or receive a bequest, the income is wholly aleatory. 
The law of chance governing such isolated occurrences may 
be of interest to the mathematician, but is of little importance 
to the economist. The line between aleatory and ordinary 
profits is, however, not so easy to draw. In the first place, we 



358 Profits. [§ 153 

have the great field of speculative profits, to be discussed in a 
moment.^ Secondly, there is an element of luck in all business. 
The oscillations of demand and supply are frequently influ-. 
enced by accident. A flood, an invention, a war, a new whim 
in fashion, a chance occurrence of any kind, may affect the 
individual or the group, the producer or the consumer, and by 
influencing either cost or price modify business profits. In 
one sense all price fluctuations are accidental. 

A distinction is sometimes drawn between industrial and 
pecuniary profits. By industrial profits in the broad sense are 
meant profits derived from the production and sale of repro- 
ducible goods, such as compose the great mass of the annual 
output of wealth. " Industrial " in this sense would include 
agricultural and commercial profits. Pecuniary profits, on the 
other hand, comprise the results of such transactions as have 
to deal only secondarily with production and primarily with 
sale, not from producer to consumer, but from one owner to 
another. The chief example of such pecuniary profits nowa- 
days is the dealing in vast masses of vendible capital, irrespec- 
tive of its industrial uses. Many of the large fortunes of 
recent times have been derived from such sporadic or fortui- 
tous profits. When financiers trade in railway securities or 
" industrial " stocks, their profits on each isolated transaction 
may be independent of, or even opposed to, the best manage- 
ment of the corporation as reflected in higher quotations ; for 
their profits may come from buying at lower, rather than sell- 
ing at higher, prices. But even here, with all the abuses of 
which the practices are susceptible, the permanence of pecu- 
niary profits as a whole is ultimately connected with industrial 
progress. If stocks go down, the profits of some must be 
counterbalanced by the losses of others ; but if stocks go up, 
every one may participate in the gain, and even if there are 
some losses they may be more than compensated by the profits 
of others. Stocks, however, can rise permanently only if the 
enterprise earns more, that is, if it is industrially more efficient. 
Thus, while pecuniary profits may in individual cases be the 



§ 154] Speculative Profits. 359 

result of a change in ownership, with no assignable relation to 
the production or utilization of the commodities which the 
securities represent, pecuniary profits as a whole have, in last 
instance, a real connection with the industrial profits on which 
they finally rest. 

Chance or luck, therefore, may often be the cause of sporadic 
profits, but cannot explain their persistence either for the in- 
dividual or for society. The individual who attempts to secure 
pecuniary profits can in the long run succeed only if he uses 
good judgment, foresight and practical sagacity, thus elimi- 
nating more .and more the influence of blind chance. The 
financier, like the manufacturer or merchant, is really a servant 
of society ; like some servants, he may be refractory, unfaith- 
ful or treacherous, but in the main he will fare best when he 
best subserves the interests of society. The aleatory element 
is inseparable from profits, since profits are derived from 
fluctuations ; but the ultimate cause of persistent profits is the 
ability of the individual to take advantage of the fluctuation, — 
and in the long run this ability plays into the hands of society 
at large. 

154. Speculative Profits — Nature. 

By speculation is meant the purchase or sale of anything in 
the hope of profit from an anticipated change in its price. It 
differs from ordinary trade only in degree, for all profit, as we 
have seen, has an aleatory element. The difference, however, 
consists in the fact that speculation concentrates and intensi- 
fies the forces which affect demand and supply. 

Speculation was in former times chiefly place speculation. 
The practice of buying in one market and selling at almost 
the same time in another has been lessened by the modern 
means of transportation and communication, whereby price 
fluctuations between places have been minimized. It exists 
to-day chiefly in the form of " arbitrage " of stock or com- 
mission brokers, and its success depends on the rapidity with 
which their telegraphic facilities may enable them to anticipate 



360 Profits. [§ 154 

the published quotations on the exchanges. The more im- 
portant, form at present is time speculation based on price 
fluctuations after the lapse of an interval of time. 

Speculation, again, may be sporadic or regular. Sporadic 
speculation is almost as old as business itself. It is the result 
either of a popular frenzy or of a deliberate scheme to take 
advantage of a temporary occurrence. An example of the 
first kind is the tulip mania in seventeenth-century Holland, 
when the most fabulous profits were made by those who had 
anticipated the short-lived demand for bulbs. So also the 
occasional speculative " booms " in real estate at. present are 
the cause of enormous profits, followed by corresponding 
losses when the bubble is pricked. In such, cases speculation 
is due to changes in demand, which it is almost impossible for 
individuals to foresee or to control. Supply, on the other 
hand, lends itself more readily to manipulation, and deliberate 
attempts are not infrequently made to accomplish this end. 
From the efforts of Joseph to buy up the corn crop in Egypt, 
and from the decision of the Greek philosopher to show his 
practical wisdom by purchasing in advance of the vintage all 
the winepresses, down to the modern pools and rings, attempts 
to corner the market are occasionally found. While sometimes 
successful in minor cases, they commonly fail when on a large 
scale. The failure is due («) to the immensity of the capi- 
tal required, {b) to the difficulty of procuring and retaining 
trusty confederates whose selfish interests may often be best 
subserved by selling when their principal is buying, (<:) to 
the fact that rising prices will bring to the market all the 
reserved stock, and {d) to the danger of the substitution by 
the consumer of some cheaper commodity. Thus, while the 
successful corner in Harlem stock in 1863 laid the foundation 
of the Vanderbilt fortunes, the three most picturesque and 
gigantic attempts of the last two decades — the Chicago Leiter 
corner in wheat, the Paris Secretan corner in copper and the 
New York Sully corner in cotton — have all been failures, 
resulting in the ruin of the speculators. 



§ 154] speculative Profits. 361 

Both classes of sporadic speculation are in the end socially 
disadvantageous, because the speculative price is driven far 
above or below the true value, with resulting losses in the 
process of restoring the equilibrium. The inordinately high 
cotton prices, due to the speculative attempts of 1904, well- 
nigh produced a crisis in the cotton industry in England and 
New England, and while the Southern planters temporarily 
benefited, the high profits led to such an increased acreage 
during the next season that the price fell below the cost of 
production. A moderately remunerative price would have 
been preferable to these sudden alternations of large profits 
and extreme losses. 

It would, however, be a mistake to assume that all speculation 
is of this character. Speculation could never have become a 
part of the normal business life of modern times if it had sim- 
ply these defects and anti-social characteristics. The modern 
stock and produce exchanges have a definite economic func- 
tion to perform. 

Speculation occurs in securities or commodities. The qual- 
ities which render a commodity peculiarly fit for regular specu- 
lative dealings are three in number : (a) it must be a staple, 
with a large and regular production ; (d) it must be homo- 
geneous in quality, so that any unit will be as acceptable as 
another ; (r) it must be capable of ready definition and 
measurement. Accordingly we find exchanges devoted to 
cereals, like wheat, rye, barley, corn and oats, to coffee and 
sugar, to cotton and tobacco, to iron and tin. In the case 
of securities all those qualities are obviously present. The 
chief transactions on both the stock and produce exchanges 
may be summarized as follows. 

If prices in the estimation of the speculator are high but 
tend downward, he will " sell short," that is, engage to deliver 
at a future time goods not yet in his possession. If, when the 
time arrives, he can purchase at the anticipated lower price, 
the difference constitutes his profits. Or the same result can 
be reached by a "covering" contract, so called because he 



362 Profits. [§ 154 

covers the short sale by making a purchase at a somewhat 
lower price deliverable at the same time. On the other hand, if 
prices are low but in his estimation tend upward, he will " buy 
long," that is, buy more than he would care to take at present ; 
and when the goods are finally delivered he can sell at a profit. 
Or, as in the preceding case, he can at once make a " realizing " 
or " liquidating " sale at a higher price, deliverable at the same 
time. Because the "shorts" speculate for a fall, they are 
called bears (who pull down) ; while the "longs," who specu- 
late for a rise, are called bulls (who toss up). When a sub- 
stantial interval of time elapses between the two parts of the 
transaction, it is called a " future." Cotton futures, for in- 
stance, are dealt in months before the transaction is closed. 
June deliveries may be sold in January. Where the delivery 
is to take place at once, that is, on the spot or in the imme- 
diate future, we speak of " spot " cotton or wheat. 

On the stock exchange most of the deliveries take place on 
the following day, although, as in New York, the option of deliv- 
ery is sometimes three, sometimes thirty or sixty days. Apart 
from the mere gains in daily speculation through " scalping," 
the profits on the stock exchange are realized chiefly through 
loans. If the " short," for instance, is not ready to buy in 
the stocks when delivery is due, he arranges to borrow them, 
expecting to liquidate his loan by a future purchase at lower 
prices. Vice versa, the "long" purchaser who is not ready to 
sell arranges with a broker to " carry " the stocks for him until 
such time as he can sell at a profit. The broker protects 
himself against any possible fall in price by requiring the cus- 
tomer to put up a margin in cash, which differs with the 
price fluctuations. In the produce exchange it is the practice 
to deposit with some constituted authority the margin or sum 
sufficient to secure the other party from loss in case of failure 
to fulfil the contract for future delivery. Such transactions 
are therefore called speculating on a margin. In practice it is 
impossible to distinguish between margin dealings where there 
is no delivery and those where actual delivery is made or 



fi 155] Speculative Profits. 363 

contemplated, since the difference depends on the shifting in- 
tention of the speculator, and since in every contract actual 
delivery of the stock or produce can legally be called for. 
Finally, speculation takes the form of privileges. A "put" is 
the privilege to put or deliver to the other party at a definite 
time the security or commodity at a fixed price. A " call " is 
the privilege to call or demand from the other party at a defi- 
nite time the security or commodity at a fixed price. Puts 
and calls may be bought or sold ; when a speculator acquires 
the right of electing whether to put or call the stock the 
privilege is called a " spread " or " straddle." Prices of such 
privileges depend on the nature of the market, the nature of 
the security, the length of time the privilege has to run and the 
difference of the stipulated from the present market price. 

155. Speculative Profits — Function. 

The chief economic function of regular speculation consists 
in the assumption of risk and results in the equalization of 
price. 

First, as to the assumption of risk. When, under the stress 
of modern capitalism, deaUngs in commodities became national 
and even international, the perturbations affecting market values 
grew to be so vast and so numerous that ordinary business was 
seriously compromised by the violent fluctuations in the price 
of the raw materials of industry. The manufacturer who 
bought his materials in the international market expected 
indeed a profit on the production of the finished article, but 
was unwilling to have this profit turned into loss by sudden 
changes in the price of the raw material. It was to secure an 
escape from the risks of such oscillations that a special class 
arose which assumed this risk and by concentrated attention 
derived a profit from the price fluctuations. 

The first way in which risk is minimized for the ordinary 
business man and assumed by a regular speculative class is 
through the provision of a continuous open market. A cotton- 
spinner^ for instance, accepts an order for goods to be delivered 



3^4 



Profits. [§ 155 



in a year, and expects to begin spinning in six nnonths. Unless 
he is able to buy now the cotton to be delivered then, he will 
be at the mercy of the chance variations in the cotton market, 
and although he may be the most capable of business men 
his entire profit may be wiped out by a rise in the price of 
cotton. The cotton future enables him to eliminate this risk. 
The same is true of futures in wheat or other commodities. 
It applies equally to the stock exchange. If a railway or 
other industry, in launching a new enterprise, had to depend 
on the chance investors at the time of the issue of the securi- 
ties, it would be seriously hampered. The mere knowledge 
that at any moment there will be a ready sale on the exchange 
greatly increases the circle of purchasers, many of whom may 
not intend to be permanent investors. The stock exchange 
aids the investment of capital, as the produce exchange aids 
the production of finished commodities. Business orders and 
corporate needs are intermittent, because they depend on 
temporary exigencies ; the risks at one end, at all events, are 
eliminated by the unintermittent, continuous market which 
regular speculation affords. The cotton exchange was the 
result of the disorganization of the cotton trade after the civil 
war ; speculation in all the other staples has in the same way 
been the consequence of the efforts of the manufacturer to 
avert the risks of intermittent and spasmodic fluctuations in 
the raw material. 

A natural and more recent outcome of this attempt to avoid 
risk is the practice of " hedging " or " covering " transactions. 
An English miller, for instance, needs wheat in February and 
buys his supply in California, let us say, at a price of 90 cents 
a bushel. By the time the wheat reaches his mill and the flour 
has been finally disposed of, it may be September, and the price 
of wheat may have fallen to 75 cents, with a corresponding fall 
in the price of flour. To protect himself against such a loss 
the miller sells in February at Chicago for September delivery 
the same quantity of wheat for the same price as that at which 
he bought, 90 cents. When September arrives, he again enters 



§ 155] Speculative Profits. 365 

the Chicago market and makes good his delivery contract by 
buying the wheat at the market price of 75 cents. His profits 
in this deal equal his losses in the other, and by this process of 
" hedging " contracts he eliminates all risk in price fluctuations 
due to the raw material. He is content to derive his gains 
from the profits of his legitimate milling business. Through 
the use of such wheat and cotton futures we thus have the 
paradoxical result that the business man often resorts to specu- 
lation in order to free his business from speculative influences. 

The result of regular speculation, again, is to steady prices. 
If with wheat prices at 80 cents a bushel there is a prospect 
of a large crop, the intelligent speculator wiU sell short (a 
future) say at 70 cents, expecting to buy in at 65 cents. All 
this selling on the part of the bears, however, tends to reduce 
present prices and thus to increase consumption, which again 
tends to keep the future price from falling so low or so suddenly 
as it would otherwise have done. Vice versa, if a crop short- 
age is in prospect, prices tend to rise, the commodity becomes 
a "good buy" and the bulls are active. The increased pur- 
chases tend to raise present prices and to check consumption, 
while the owners in a rising market hold on for the prospec- 
tive profit. This combination of a somewhat smaller demand 
and a larger supply will prevent such a sharp rise in prices as 
would ordinarily follow a bad crop. Speculation thus tends to 
equalize demand and supply, and by concentrating in the 
present the influences of the future it intensifies the normal 
factors and minimizes the market fluctuation. Speculation 
hence exerts a directive influence on price. A good example of 
this is afforded by the Gold Law during the civil war. The 
discount on greenbacks was mistakenly ascribed to the specu- 
lation on the gold exchange, and a law was enacted to prohibit 
all such transactions. As a result, the premium on gold jumped 
at once from 195 to 285, with wild fluctuations day by day, to 
be followed, after the hasty repeal of the law fifteen days later, 
by just as sudden a recession of the price. 

Speculation is hence so perplexing a phenomenon because 



366 Profits. [§ 156 

of its Janus-like aspect. So far as it has become the regular 
occupation of a class, differentiated from other business men 
for this particular purpose, it subserves a useful and in modern 
times an indispensable function. The expert dealer on the 
exchanges, who studies and prejudges the market, will in the 
long run secure profits by reducing risks and steadying prices. 
In this wider sense speculative profits are earned like other 
profits. On the other hand, numbers of individuals without 
experience or ability are constantly taking " flyers " on the 
exchanges, and gamble in securities or commodities as they 
would in cards. Speculation here is as demoralizing to earnest 
effort and thrift as is the lottery. Moreover, even the profes- 
sional dealer will often indulge in what we have termed spo- 
radic speculation, and by an extensive manipulation of the 
market bring about the unsteadying of prices usually connected 
with a " squeeze "or a " corner." Difficult as it is to draw 
the line in practice, the distinction between economic and 
uneconomic speculation is faintly recognized in the ordinary 
attitude toward the bucket-rhop as compared to the stock 
exchange. It will be more clearly appreciated in the future 
when the exchanges themselves exercise a more rigid scrutiny 
over the actions of their members, and when business ethics 
will be lifted to a higher plane of social responsibility. At 
present speculation has its economic abuses as well as its 
economic function. 

156. Monopoly Profits. 

In the preceding discussion profits, whether ordinary, alea- 
tory or speculative, have been assumed to be subject to 
competitive influences. The free play of competition, how- 
ever, is often obstructed by natural or artificial barriers. When 
these obstacles are only partial, we speak of economic friction ; 
when they are complete, we are in the presence of monopoly. 
In the case of friction, the fortunate possessor of the tempo- 
rary advantages secures an extra gain, which, as we know, will 
ultimately disappear. In the case of monopoly the extra 



§ 156] Monopoly Profits. 367 

gain seems to be permanent. In a deeper sense, however, 
even monopoly profits are not permanent. This is due to 
the principle of capitalization, discussed above (ch. xiv). As 
soon as the monopoly producer disposes of his business, the 
profits are capitalized into the higher selling price, and the 
new purchaser will secure only the interest on the capital 
outlay. While monopolies are not often sold, the same result 
is reached through the modern corporate form of business. 
For here the securities, which entitle each holder to a share of 
the monopoly profits, are so influenced by the forces of the 
market that large dividends are at once capitalized into higher 
market prices, with the result that the net returns to the new 
purchaser will be only the current market rate of interest. 
Thus, under modern economic conditions, even monopoly 
profits tend to dissipate themselves. They are essentially 
transitory, except in the hands of the original owners. With 
the continual shifting of ownership, so characteristic of mod- 
ern Hfe, the original possessors soon disappear. Since, how- 
ever, the original owners at any given time are an appreciable 
body, monopoly profits often assume a great importance. 

Monopoly incomes, like competitive incomes, are not limited 
to profits. A class of workmen may be able to restrict entrance 
to their trade or to prevent competition with it. In that case 
they would secure monopoly wages. Where the investments 
by banks, savings institutions or trust estates are confined by law 
to a specific kind of bond, there is virtually an element of 
monopoly in the price of that security. Where a particu- 
lar city plot is wanted for specific purposes, the element of 
superiority in the site approaches so close to monopoly that we 
can without gross error speak of a monopoly rent. Monopoly 
profits, however, like all profits, are a result of price. As we 
have already discussed the differences between monopoly price 
and competitive price, we may pass these by in this place with 
the mere reminder that monopoly profits are by no means 
without bounds. The two natural limitations on monopoly 
price, and hence on monopoly profits, are the existence of 



368 Profits. [§ 157 

substitution and of potential competition. In the first place, 
as we have learned (p. 256), even where the monopolist is 
securely intrenched, there is always a point of maximum mo- 
nopoly revenue depending on the price at which the greatest 
sales can be effected. Any increase of price above that point 
will lead to the falling off of sales through the substitution of 
some analogous commodity, and thus to a decrease of profits. 
The failure of the Secr^tan corner in copper was largely due to 
the unexpected use of substitutes, caused by the forcing up of 
the price. Secondly, when, as in many cases, the monopolist 
is subject to the potential competition not of similar com- 
modities but of other possible producers of the same commod- 
ity, his tendency to raise prices will be limited by the danger 
riot only of a falling off in the general demand, but of the 
capture of a part of this existing market by some new-comer 
who is tempted by the prospect Of similar profits. Within 
these limits, however, there is still a large field for the extra 
gains known as monopoly profits. 

157. Hegulation and Justification of Profits. 

The demand for governmental control of profits comes from 
three sources, — those who object to ordinary profits because 
they oppose private property ; those who decry aleatory and 
especially speculative profits ; and thirdly, those who desire to 
eliminate monopoly profits. Let us discuss these in inverse 
order, 

( I ) Unrestricted monopoly profits, are of course, socially un- 
desirable. Even where monopoly is not in itself objectionable, 
as in special fields like transportation and certain municipal en- 
terprises, some substitute for the automatic regulative action of 
competition must be secured. Experience, however, has re- 
peatedly shown that this cannot take the form of a regulation 
of profits. The most recent attempt, as that of Massachusetts 
;with the gas companies, has, like all its predecessors, been frus- 
trated by the ease with which profits can be adroitly diverted 
into the income of subsidiary enterprises. Efforts to regulate 



§ 15 7] Regulation and Justification. 369 

profits always result in profits nominally within the limit. The 
only two effectual ways to deflect monopoly profits to the pub- 
lic are either to regulate prices, which will prevent the profits, 
or to tax the enterprise, which will reduce the profits. The 
surest method, however, of eliminating monopoly profits is 
to eliminate the monopoly by keeping open the door of 
opportunity. 

(2) Speculative profits, on the other hand, cannot be reached 
in this way. Monopoly can be distinguished from competition, 
but regular speculation cannot be sharply set off from ordinary 
business. The recent anti-option laws of Germany have either 
been ineffectual or have done harm in preventing the legiti- 
mate and economic benefits of speculation. To prohibit spec- 
ulation is to prevent the good as well as the evil. Taxation, 
again, is applicable only to certain aleatory profits. The effort 
to tax speculative profits encounters the well-nigh insuperable 
difficulty of causing the tax to be actually borne by the recip- 
ient of the profits. Finally, the prohibition of speculative 
prices is virtually equivalent to the futile prohibition of spec- 
ulation itself. 

(3) The opposition to ordinary profits emanates from those 
who deprecate the entire constitution of modern industrial 
society. According to Marx, for instance, profits are a defal- 
cation from wages. Since all value, according to him, is the 
product of labor, the surplus value which is called profits is 
a surplus filched from wages. The socialist theory of surplus 
value, however, is defective in four points : (a) It identifies 
labor with manual work and neglects the wages of superintend- 
ence ; (/>) it ascribes value to labor, whereas labor is not the 
cause of value ; (<^) it reduces the factors of production to one, 
whereas in actual life there are almost always more than one ; 
(ii) above all, it overlooks the fact of marginal value. Even 
if we roughly state that prices vary according to cost of pro- 
duction, and even if for purposes of argument we concede 
that cost of production is reducible to wages, all this would 
apply only to marginal cost. The marginal producer, however, 

24 



370 Profits. [§157 

normally earns no profits, and the surplus which is secured 
by the intraraarginal producer may come from a dozen other 
sources than wages. In point of fact it is most unlikely to 
come from wages, since wages under competitive conditions 
are apt to be the same for the identical work in all the enter- 
prises, whether marginal or intramarginal. Profits are indeed 
a surplus, but they are not a surplus of the kind imagined by 
the socialists. The only way to get rid of profits is, as the 
socialists correctly state, to abolish private property in the fac- 
tors of production. The abolition of private property, how- 
ever, would be the abolition of progress. 

This, of course, does not imply that all existing profits are 
defensible. Fraud and chicanery still stalk abroad ; illegitimate 
privileges are seized or extorted ; unfair advantage is taken of 
weakness or ignorance ; public franchises are dishonestly ac- 
quired or inadequately compensated. All this is to say that 
many individuals are still on a low plane, and that the level of 
commercial morality is not so high as it ought to be and as 
it some day will be. This, however, does not touch the legiti- 
macy of profits as an institution. Profits honestly acquired are 
in the main an inevitable concomitant of private property. 
With monopolies reduced to a minimum, with special privi- 
leges abolished or adequately compensated, with speculation 
restored to its true economic function and with competition 
conducted on the high plane of honesty and fair dealing, 
profits will be purged of their alloy and will stand forth in 
their true light as the legitimate fruit of energy and foresight. 



CHAPTER XXIV. 
RENT. 

158. References. 

J. B. Clark, Distribution (1899), chs. xiii, xxiii; F. A. Fetter, Princi- 
ples (1904), ch. X ; A. S. Johnson, Rent in Modern Economic Theory, chs. 
iii, iv ; A. Marshall, Principles ( 1898), bk. v, chs. viii-x, and bk. vi, ch. ix ; 
N. G. Pierson,/'r/««)>/^j'( 1902), part i,ch. ii; W. S. Jevons, Theory {i2>2>?>), 
ch. vi ; H. Sidgvvick, Principles (1883), bk. ii, ch. vii; F. v. Wieser, 
Natural Value (1893), b^- '"> P^""' -! T. N. Carver, Distribution (1904), 
ch. v; A. W. Flux, Principles (1904), ch. vii; II. R. Seager, Introduction 
(1904), ch. xii; The Relation between Rent and Interest (A Discussion in 
Am. Econ. Assoc. Publications, New Series, V, 1904) ; M. Pantaleoni, 
Pure Economics (1898), part 3, ch. iv; J. S. Nicholson, Prificiples (1893- 
1901), bk. ii, ch. xiv, and bk. iv, ch. v; W. Smart, Distribution (1899), 
ch. xxvi ; R. M. Hurd, Principles of City land Values (1903); T. E. 
Cliffe Leslie, land Systems of Ireland, etc. (1870); A. G. L. Rogers, The 
Business Side of Agriculture (1904) ; W. H. Dawson, The (Jneartied Incre- 
ment (1890) ; H. George, Progress and Poverty ( 1879) ; E. R. A. Seligman- 
Essays in Taxation (1904), ch. iii ; A. H. Stone, A Plantation Experiment 
(Quart. Jour. Econ., XIX, 1905) ; J. B. Clark, Essentials (1907), ch. x. 

159. Nature of Rent. 

Rent, as we have learned, is the product of, or income from, 
the single use or succession of limited uses of a thing, and 
rental value is to be contrasted with capital value. In ordinary 
parlance, however, rent signifies the money payment to the 
owner for such a limited use. According as we regard it from 
the point of view of making or of receiving the payment, to 
rent anything is to dispose of or to pay for its use. When 
the social conditions are such that some one commodity is 
commonly rented instead of sold, its income in general is apt 
to be called rent. This was true of land during the middle 

371 



372 Rent. [§ 159 

ages in Europe, and is still true in those countries where 
mediaeval customs survive or where modern conditions have 
brought about a relation of landlord and tenant. Since most 
of the land is rented, rent has come to mean the income from 
land, whether rented or not ; and since the chief thing that is 
usually rented is land, rent is often made synonymous with the 
income from land alone. 

It is obvious, however, that this is doubly confusing. In the 
first place, in some countries land is more commonly sold than 
rented. This is the case with agricultural land in a community 
of peasant proprietors or of individual farmers ; and with urban 
land in all those districts where the inhabitants, rich or poor, own 
their homes. When land is sold instead of rented, the pro- 
ceeds certainly do not constitute a rent. They should rather 
be called a capitalization of the rent, because they involve a 
payment for all future uses. Secondly, other things are often 
more commonly rented than is land. Apart from the fact that 
the rental of real estate frequently includes the rent of a house, 
which is economically distinct from the land, men may live in 
their own houses and yet rent telephones by the year, carriages 
by the month, plants by the week, and awnings or table fur- 
nishings by the day. Land rent is qualitatively only an in- 
significant part of all rent. 

Nevertheless, land is quantitatively so important as compared 
with any other single commodity, and possesses so unique a 
social significance, that the income from land merits a separate 
study. It must be remembered, however, that the utility of 
such an independent discussion emerges only when we regard 
society from the point of view of change, — that is, when we 
consider rent historically, or compare the growth of land rent 
with that of other rents. If we take a cross section of society 
at any moment, and analyze the distribution of the social 
income, the rent of land is to be explained in no different way 
from that of other things. The rent of land is its economic 
product, that is, the contribution of land over and above that 
of the labor and the capital employed on the land. The law 



§ i6o] Land Rent. 373 

which at any given moment governs the relation of the land to 
its product is the same as that which governs the relation of 
any economic good or factor of production to its product. 
Much confusion has resulted from the failure to observe this 
warning. 

The traditional law of rent, for instance, includes three state- 
ments : rent is the result of the law of diminishing returns ; 
rent is a differential or surplus over marginal or no-rent 
land ; rent is not a part of cost of production. So far as 
these statements are true, however, they are not peculiar to 
land rent. 

160. Relation of Land Rent to Other Rents. 

The law of diminishing returns is indeed the foundation of 
the law of rent. A farmer will sometime reach a point where 
it will not pay him to add another laborer or another machine 
to his land, because beyond the margin of profitable expendi- 
ture every additional " dose " of capital or labor will mean 
a return insufficient to cover cost. In every case he will reach 
the extensive or intensive margin of the utilization of land. 
This, however, is not peculiar to the landowner. The capitalist 
will also reach a point where it will not pay him to buy more 
machines of a certain kind, or to build another factory devoted 
to some particular product ; and the laborer will reach the point 
where he cannot profitably work any longer. The law of 
diminishing returns is universal, and applies to everything that 
possesses value (§ 88). If it explains the rent of land, it will 
equally explain, as we shall see, the interest of capital and the 
wages of labor. 

Secondly, it is said that land rent is a differential or surplus. 
So, however, is every other kind of rental value. The value 
of everything is a differential or surplus as compared with the 
value of something else lower down in the scale. It may be 
claimed that land rent differs from other rents in that the land 
at the margin is no-rent land, and that land rent is therefore 
due to the differences in the productivity of good land over 



374 Rent. [§ i6o 

no-rent land. To this the obvious rejoinder may be made that 
we can equally well speak of the no-rent machine or the no- 
rent factory. The reason that we do not commonly use such 
terms is because machines and factories are not so frequently 
rented as is land. The principle, however, is identical. The 
land at the margin may be so poor that no rent will be paid 
for its use ; but the machine at the margin may also be worth- 
less in just the same sense. In fact, as we have seen in the 
last chapter, the existence of profits depends upon the surplus 
earnings of the intramarginal producers. It makes no differ- 
ence whether the marginal producer uses poor land or poorly 
situated land or poor machinery or poor buildings or poor 
workmen, he will earn no surplus. From this point of view 
rent is analogous to profit : profit is the surplus over the income 
of the no-profit producer ; rent may be said to be the surplus 
over the income from the no-rent commodity. This has led 
some writers like Walker to maintain that the laws of profit 
and rent are identical. 

It would be an error, however, to press too closely this 
analogy between rent and profit. In the first place, rent is a 
surplus only in the sense that everything positive is a surplus 
over zero, — a statement which is of little help. The rent of a 
boat is a surplus over that of a no-rent boat ; the wages of a 
laborer is a surplus over that of the convict or no-wage laborer ; 
the interest of capital is a surplus over the capital so invested 
as to earn no interest. But secondly, if we regard rent as a 
surplus, it differs from profit in that rent is a permanent, and 
profit a transitory, surplus. If a machine is used in a factory, 
a certain part of the product will be traceable to it ; that is, it 
will earn a certain return or rent for its owner. Under free 
competition the price of that machine will be, as we know, the 
capitalization of its rent, due regard being had to the number 
of machines. In a state of normal equilibrium the conditions 
of supply and demand will so adjust themselves that the mar- 
ginal producer will in the long run give for a commodity only 
what he can get out of it, and others will not give more. If 



§ i6o] Land Rent. 375 

all the machines are precise duplicates and are worked under 
the same conditions, their earnings or rent will in the long run 
be equivalent to the interest on the capital invested in them. 
It will be a permanent return as long as the machines work in 
unimpaired efficiency. If the machines did not earn the rent, 
no one would buy them at that capitalized price. On the other 
hand, the only way in which profits can be secured is by the 
owner working his machine under different conditions, that is, 
by giving it more care and combining it with different propor- 
tions of labor or land, taking advantage of variations in the 
market, and so on. These profits, as we know, are under com- 
petitive conditions essentially transitory, and will disappear un- 
less renewed by the use of new machines or a new shifting of the 
productive factors. If better machines, however, are used, the 
surplus gains secured by the producer are really the difference 
in the rent or product of the good machine over that of the 
poorer machines of his competitors. To the extent that his 
profits are a differential derived solely from the use of the 
better machine, he can enjoy them only as long as he guards 
the secret, that is, as long as he retains a monopolistic advan- 
tage. Even in the case of monopoly, however, the profit, as we 
know, will disappear through the process of capitalization as 
soon as the machine or the business changes hands. Thus, 
while the rent is permanent, the profit is transitory. 

Precisely the same is true of land rent. If in a certain 
section of a city, where for a long time there has been no 
change, there are a hundred equally desirable contiguous lots, 
each of them will rent for the same amount. The rent is a 
differential only as compared with less eligible sites yielding a 
lower rent, and finally with land on the outskirts, which, like 
the Hoboken flats near New York, is worthless for residential, 
business, farming or other purposes, and which therefore has 
no capital value because it yields no rent and no product. 
Competition among the hundred lots will inevitably keep the 
rent of all at a point corresponding to the interest on their 
capital value. The landowner can earn no surplus on this 



376 



Rent. [§ i6i 



investment as long as conditions do not change. If, however, 
a new street is opened, or for some reason one of the lots 
acquires a higher rent, the landowner will secure a surplus over 
the interest on the original purchase price. Whether this sur- 
plus is called profit or rent is often thought to be immaterial : 
in point of fact, when a man sells his land he calls it profit ; 
but until he sells he calls it rent. Strictly speaking, however, 
the annual rent is the total periodic return of the land, the 
profit only the surplus of this periodic return over the cost, 
or in this case over the interest on the invested capital. As 
soon as the plot is again sold, the price which yields the old 
owner the profit is necessarily the price at which the rent will 
yield the new owner only interest on the capital. Profits are 
thus automatically extinguished by transfers. Rent is perma- 
nent as long as the rent-bearing investment lasts ; profit disap- 
pears each time that it is capitalized into a new selling price. 
The difference between rent and profit is applicable to land 
just as to other things. 

161. Rent and Price. 

Thirdly, it is stated that land rent is not a part of cost, and 
that high rents are therefore a result, not a cause, of high 
prices. It is no doubt true that if wheat is raised on land 
which differs in fertihty or situation, competition will force the 
price of all the wheat of the same grade up to the cost of 
the marginal producer, that is, the farmer on the poorest land. 
The intramarginal farmer will secure a surplus ; and if we call 
this differential surplus rent, it may be said that this differential 
does not enter into the price. Precisely the same, however, is 
true of every other share in distribution. Substitute for the 
plots of land sewing-machines rented out by the month or 
year. Some of the machines will turn out, let us say, more 
vests of the same quality than others. All the vests will sell 
at the same price, namely, the cost of the marginal producer 
with the poorest machine, and the difference between the 
marginal product and the output of the better machine will 



§ i6i] Rent and Price. 377 

under competitive conditions go as a surplus rent to the owner 
of the better machine. The surplus seems to be not a part 
of the price. Again, different employers may utilize different 
grades of workmen to fell trees or to build railways. One uses 
a three-dollar American, another a two-dollar French Canadian, 
another a dollar Italian. Yet, as Lord Brassey discovered in 
railway construction, the high-price workman is not really 
more expensive, because his output is greater. If he did not 
earn the higher wage, he would not in the long run get it. 
Since all the trees sell at the same price, namely that of the 
marginal producer who is using the least efficient workmen, the 
higher wage of the American represents a surplus product or 
labor rent over the low wage of the Italian. If we say that 
the higher rent of the good land does not enter mto the price 
of wheat, we can equally well say that the higher wage which 
represents the surplus product of the American does not enter 
into the price of trees. The good land rents or sells for more 
because it produces more, — the rent is the product : the 
high-grade laborer secures higher wages because he produces 
more, — the wage is the product. The wages of every differ- 
ent grade of workman are a differential in the same sense as 
the rent of different grades of land or capital is a differential. 

It will be said, however, that there is a distinction, because 
even the lowest wages are beyond peradventure a part of the 
cost. So, however, is the rental paid for the worst wheat land. 
The confusion arises from supposing that the worst wheat land 
is no-rent land. It is indeed no-wheat-rent land ; but this 
may still be worth a considerable sum per acre, because it can 
be used for other purposes. If the farmer cannot permanently 
earn an income from wheat, he will raise other less valuable 
cereals, or vegetables, or hay, or use the land for pasture. Every 
piece of marginal land — that is, the poorest land in use for 
some particular product — is worth something for the raising 
of a less valuable product, until we finally reach land that is 
worth nothing for any purpose. In the cost of the wheat, there- 
fore, there must always be included the rent which the marginal 



378 



Rent. [§ i6i 



(or no-wheat-rent) land would earn if employed for the next 
lower use. 

Furthermore, not only must the marginal rent always be in- 
cluded in cost and therefore in price, but in a higher sense 
the differential rent, as a permanent phenomenon, also affects 
the price. The rent of anything is its product ; the greater 
product of the better land forms as much an element of the 
supply as the smaller product of the poorer land, and price de- 
pends on the relation of the total supply to the total demand. 
If the better land yielded less, the total supply would be 
smaller and the price would rise, thus leading to the culti- 
vation of a new marginal land. Price in general, as we know 
(§ 112), is not fixed by the marginal or maximum cost but 
at the marginal cost, and the margin depends upon the output 
of the better grades, receding as this increases, advancing as 
it falls. Every bushel of wheat, whether it comes from good 
or poor land, affects the supply, the price and the margin. 

To say that rent does not enter into price is doubly con- 
fusing, not only because it implies that land rent differs in 
this respect from other rents, but also because the general 
statement is itself misleading. If two different instrum-ents or 
two different grades of the same instrument are permanently 
used to produce a certain commodity, their rent or permanent 
contribution to the product will of course differ. If the owner 
of the better grade is magnanimous enough to present this 
permanent surplus to the one who rents the instrument, that is, 
if he remits the rent, it will indeed make no difference in the 
price as long as the product is finally sold on the market. In 
this sense only can it be said that rent does not enter into 
price ; for the price will be uninfluenced by the fact whether 
the owner retains or foregoes the rent. If he remits the rent, 
it will disappear so far as he is concerned, and the rent will 
in that sense not enter into price. It is clear, however, that 
what really disappears is not the rent, but its original owner- 
ship. The rent still exists, although it is now in the hands 
of the tenant. If a sewing-machine company gave certain 



§ i62] Growth of Land Rent. 379 

operators the use of the machine free of rent, and if the 
vests were sold at an unchanged price, the rent would stay in 
the hands of the operators instead of the company. The only 
way the rent can be made to disappear is to destroy the 
product. The transfer of ownership does not blot it out. The 
rent of the better instrument is the product of the better instru- 
ment. Each unit in the supply is a part of the total product 
or total rent, and must therefore affect the price. Hence 
the rent or product of any instrument of production, whether 
it be land or capital or labor, whether it be marginal or differ- 
ential rent, is really an element in the price, in the sense that 
were it not for that product the price would be different. 
Land is here in precisely the same position as other things. 

Notwithstanding these analogies of land rent to other rents, 
however, there remains one difference to which attention has 
already been called. In the case of so-called manufactured 
commodities, increase of demand and production often goes 
hand in hand with lower price ; in the case of land increase of 
demand generally means higher price. The supply does not 
respond to the demand with the same rapidity. Land is 
indeed not alone in this respect, for the same is true of many 
things that cannot be duplicated or easily reproduced. Land 
is, however, of such overwhelming importance, as compared to 
those other things, that when we consider its influence on the 
progress of value it is usefully contrasted with them. We 
shall therefore proceed to consider more specifically the rent 
of land. 

162. Growth of Land Rent. 

A distinction is sometimes drawn between land rent and 
ground rent : the former is the rent of land for securing 
some material produce, the latter the rent of ground used as a 
building site. Practically the distinction is one between agri- 
cultural and urban land. Strictly speaking, however, rural land 
can be utilized fo.r other than agricultural purposes, while 
land within the city limits is sometimes used for agriculture. 



380 Rent. [§ 162 

According to some authors land rent arises from the fact that 
the price, of agricultural products is the same while the cost 
of production differs ; ground rent, from the fact that prices 
differ while the cost of production remains the same. This, 
however, is inaccurate. Ground rents differ for precisely the 
same reason as land rents, that is, because city lots, like 
country tracts, vary in their power of affording utilities. Both 
are productive, even though they produce different kinds 
of utilities • the rural land has a value because its material 
products are wanted, the urban land because it is needed as 
the support of a house or the meeting-place of human beings. 
To assert that the value of land is due to fertility or in- 
equality or scarcity or monopoly is either half true or inade- 
quate. Situation is as important as fertility. Inequality is a 
measure of the difference in value, not the cause of value. 
Scarcity is an ingredient in the value of every economic good. 
Monopoly may perhaps be predicated of particularly choice 
sites, but hardly of land in general, the different qualities of 
which shade into each other by imperceptible gradations, from 
the vast mass of unoccupied land upward. The rent of each 
piece of land is due to its productive efficiency, and the rental 
value of any plot is the expression of its marginal contribution 
to the product. 

In discussing the growth of rent, therefore, the location of the 
margin becomes of importance. We must remember the dis- 
tinction in § 73 between the economic and the non-economic 
margin. The margin may be at such a point that the value of 
the contribution is zero. Here we have the non-economic 
margin. This may be due to the fact that the land is either so 
abundant or so poor in situation or fertility that the value of 
the produce will only just remunerate the labor or the capital 
employed. The product must normally suffice to pay current 
wages on that grade of labor or current interest on that class of 
capital, because otherwise that labor and that capital would be 
withdrawn to other enterprises. But there will be no surplus. 
The land, in other words, will yield no rent, because its contri- 



§ i62] Growth of Land Rent. 381 

bution at the margin is zero. The value of the joint product is 
due wholly to the labor and the capital. 

If, however, population grows so that the same product now 
acquires an increased value, there will be a surplus ascribable 
to the land. If all the land were of the same grade, and if it 
remained unaltered in quantity, this surplus would be divided 
equally. Since, however, land differs in fertility and situation, 
any increase in the demand will result in the better grades 
securing the greater part of the surplus, while the land formerly 
at the margin will yield a small surplus, and land hitherto un- 
utilized will become a new margin, yielding mere wages and 
interest. If for some reason the supply of land cannot be in- 
creased beyond a given point, the intensive margin will be 
moved up, and the marginal or poorest land will now also yield 
a surplus. The intensive margin now becomes a base from 
which the surplus of all land is calculated. 

The simplest illustration is urban land. If a cross roads 
hamlet springs up in the centre of an agricultural district, the 
land previously of use only for farming purposes yields an ad- 
ditional rent as the site of cheap wooden structures. The 
margin has been extended. As population and prosperity in- 
crease, the hamlet grows into a village, a town, a city, and the 
successive tracts acquire a rent so high that the cottage gives 
way progressively to the brick building, the stone mansion and 
the steel sky-scraper. Just as we speak of pasture land or 
wheat land or truck gardening land, so we can speak of cottage 
sites, brick- building sites, stone-mansion sites and sky-scraper 
sites. Each class of land can be best utilized for certain pur- 
poses, and there are as many margins as there are classes. 
With every change each margin is pushed farther out, the dif- 
ference in the rent of all intermediate sections being finally in 
proportion to the distance of the lowest margin or suburban 
farm area from the centre. The location of the margin de- 
pends on the extent of the demand as modified by the means 
of transportation. Each addition to the demand will call forth 
an addition to the total supply, but since this addition can 



382 



Rent. [§ 162 



come only at the fringe, it is an increase of less eligible land. 
Increased demand for houses can be met by building equally 
good houses ; increased demand for sites can be met only by 
less eligible sites. Under ordinary conditions of progress, there- 
fore, ground rent may be expected constantly to increase. 

The expectation may, however, be frustrated not only by the 
fact that different sections of the city may prosper unequally, 
but also by the fact that an improvement in the means of trans- 
portation may decrease the relative eligibility, and therefore the 
rent, of intermediate sections. These practical considerations 
have an important bearing on the problem of the shifting of a 
tax on ground rent as compared to house rent. 

In the case of land rent the interference with the normal 
growth is more pronounced than in the case of ground rent. 
While it is ordinarily true that the best lands will be first culti- 
vated, it has happened in many parts of the world that the less 
fertile lands on the hillsides were preferred because they were 
relatively safe from the incursions of marauders. With the ad- 
vent of peaceful conditions, recourse was had to the better 
lands in the plains or valleys, with an ensuing fall in the rent of 
the original tracts. The same result is often brought about by 
the opening of fertile lands in newer sections. The entrance 
of the middle and far West into the international market, with 
the consequent increase of supply and lower price of wheat, has 
resulted in a great fall in rents in those parts of New England 
and Europe exposed to the competition. Finally is to be 
noticed the effect of agricultural improvements. If they apply 
to all lands, they will lessen the cost, make possible the relocation 
of a new and lower margin, and reduce the price and therefore 
the rent of all lands. If the improvements remain, for a time 
at least, the exclusive possession of the more ingenious or 
capable farmers, whereby their share of the increased output 
more than outweighs the reduction in price, their rents will in- 
crease. If this advantage accrues to entire sections or coun- 
tries, the rent in them will grow at the expense of the others, 
just as in consequence of improvements in transportation the 



§ 163] Land Rent and Tenure. 383 

rents in the far West of America have increased, while those in 
New England have diminished. 

Whether land rents in general, at any given period, will in- 
crease or decrease depends thus on the relation of population 
to improvements. Growth of population or an elevation of the 
standard of life means increased demand ; improvements in 
production or transportation mean increased supply. When 
the population keeps ahead of the improvements, rents will 
rise. When the improvements keep ahead of the population, 
rents will fall. Since, however, the demand for food is nowa- 
days of an international character, a rise of rent in those coun- 
tries or sections which possess or retain the advantage of the 
improvements will still be compatible with a general increase 
in population. In modern times the increase of population is 
more and more due to the growth of industry, which is again 
ascribable to improvements in production. At bottom, therefore, 
the growth of rent depends on the relative rapidity of improve- 
ments in industry as compared with those in agriculture or in 
industry applied to agriculture. Since there is on the whole a 
broader field for industrial improvement, it may be surmised 
that ultimately land rents will normally rise. For long periods 
in history, however, land rents may remain stationary or even 
decline, not only in particular countries, as at present, but in 
the world at large. 

163. Land Rent and Land Tenure. 

Since land rent is the permanent surplus or periodic prod- 
uct of the bare land, it is to be distinguished from what often 
seems to be the total return of the land. If a man works the 
land, a part of the product is really wages ; if he applies con- 
crete capital to the land, another part is really the rent of 
those instruments, which in the long run must be equivalent 
to the interest on the capital invested in them ; if he com- 
bines the factors, so that for the time being he can undersell 
his competitors or secure a greater output at the same price, 
still another part of the product is profits. The wages and 



384 Rent. [§ 163 

the interest are permanent ; the profits will disappear as soon 
as they are capitalized into a higher selling value of the land 
or as soon as the methods of the more successful cultivator 
become general. 

When a farmer owns and works the land, it is difficult to 
distinguish these various shares in the product. When the 
owner supplies the land and part of the capital to the tenant 
who does the work, it is slightly easier to disentangle the 
shares. When the proprietor furnishes the land and the ten- 
ant does all the rest, we have the simplest example. In such 
a case the contract rent paid by the tenant in money or in kind 
is the economic land rent proper; the surplus above the con- 
tract rent represents his wages as well as the interest on his 
invested capital and his profits. The wages and interest, as we 
shall soon learn, are f'xed amounts, while any excess which he 
can for the time b-^lng retain constitutes his agricultural profits. 
If, however, the profits are due to improvements the secret or 
knack of which the tenant cannot permanently retain — as, 
for instance, the use of new manures or of better crop rota- 
tion — they will disappear. According to the conditions of 
the market the surplus will either be dissipated into lower 
prices for the produce, or, on the contrary, will be converted 
into a higher rental value of the land. The only permanent 
constituents of the output or price under competitive condi- 
tions are wages, interest and rent. 

The contract rent paid in money or in kind for any plot of 
land thus tends under competitive conditions to be equal to 
that sum which will just enable the marginal or least efficient 
tenant to make normal wages and interest. From the point of 
view of profits it is a non-economic margin (§ 73) ; from 
that of interest or wages, an economic margin. That is, the 
tenant at the margin makes no profits, but if he did not get 
back his interest on capital he could not afford in the long run 
to use the capital, and if he did not earn current wages he 
would become a wage-earner. The competition for different 
plots of equally good land tends to force the rent up to the 



§ i6^] Land Rent and Tenure. 385 

point where no profits are left for the least efficient competitor. 
The rent paid for land is thus the amount that is produced 
by the marginal farmer in excess of wages and interest. 
Under competitive condition'^ this excess goes to the owner, 
while any temporary surplus goes as profits to the tenant. 

Under actual conditions the contract rent may diverge from 
the pure economic rent. This is due to economic friction. 
Economic rent may be defined as the rent which an intel- 
ligent tenant who enjoys complete mobility of labor, who has 
an alternative investment for his capital and who is thor- 
oughly acquainted with the conditions of the market, could 
afford to pay. But where there is ignorance, lack of opportu- 
nity or lack of mobility on the part of the tenant, actual rent 
may be higher than economic rent. On the other hand, 
where for social or other reasons the owner does not exact the 
uttermost farthing, the actual rent may be lower than the eco- 
nomic or rack rent. This, however, is just as true of other 
rents as of land rents. 

While the simplest form of land rent is that for the use of 
the bare land, experience has shown the utility of a different 
method. This is known in Europe as the metayer plan and in 
America as the share system, because the owner and tenant 
share in the factors of production and therefore in their re- 
muneration. Share tenure is thus contrasted with cash tenure, 
where the tenant pays a cash sum for the use of the land and 
keeps the rest of the product. The most complete develop- 
ment of this has taken place in the Southern states, where no 
less than three important variations of the share system are 
found. They are known as the cropping system, the " third 
and fourth" and "standing rent" methods. In all cases the 
owner furnishes free of charge a dwelling-house, wood and 
water, pasture for pigs and cows and a small plot for a truck 
patch. In the cropping system the tenant or cropper does all 
the work and supplies his own food ; the landlord furnishes 
seed, farming implements, animals and half the fertilizer. He 
also bears half the expense of ginning and wrapping the cot- 

25 



386 Rent. [§ 163 

ton. The crop is then divided equally, and the system is hence 
sometimes called farming " on halves." In the " third and 
fourth " system the owner provides everything except the 
labor, the tenant getting one-fourth of the crop ; or the tenant 
furnishes in addition his own food and receives one-third of 
the crop. More commonly, however, the same name is 
appUed to the system where the tenant furnishes labor, tools 
and animals, while the owner gives only the house and land, and 
therefore receives only one-third of some crops, like grain, and 
a quarter of others, like cotton That is, the landlord and not 
the tenant gets the third or the fourth part of the product. 
In such cases the " third and fourth " renter occupies a rela- 
tively higher position than the mere cropper. In the case of 
" fixed " or " standing rent " the landlord furnishes nothing 
except the minimum mentioned above as common to all share 
systems, and likewise exercises no supervision over the labor of 
the tenant. The "standing rent" system always calls for the 
production of some specific commodity, while in the money or 
cash rent system the tenant is free to do as he likes. " Standing 
rent " is thus the nearest approach of the share rent to the 
mone)4 rent, and is naturally the one suited to the better grade 
of tenants. In Europe other variations of the system are 
introduced by the apportionment of taxes between owner and 
tenant. 

The subject of land tenure has become so important because 
of the connection between the payment of the rent, the energy 
of the cultivator and the productivity of the land, as well as 
because of the social consequences of land ownership. Under 
the feudal system there was an almost complete divorce 
between owner and cultivator. With the growth of prosperity 
the serf gradually became a free tenant, and in some parts of 
Europe the tenant has become a peasant proprietor or inde- 
pendent farmer. In Ireland the transition is still in process, 
and has been much facilitated by the series of laws which 
began in the seventies and culminated in the Land Purchase 
Act of 1003. In the United States, which was (except in the 



§ i63] 



Land Rent and Tenure, 



387 



South) almost from the beginning the home of independent 
farmers, there has been during the past few decades an increase 
in the proportion of farm tenants to farm owners. This is 
apparent from the following table : 







Number of Farms Operated by 


PerCentof Farms 
Operated by 




Total 








Year. 


Number of 




« 


to 


m 


•A 


M 




Farms. 


V 


■s = 


>- c 


V 


-c c 


«i 






c 


ug 


in u 




u£ 


■c a 









H 


H 





H 


H 


The United States. 
















1900 


5,739,657 


3,713.371 


752,920 


1,273,336 


64.7 


131 


22.2 


1890 


4,564,641 


3,269,728 


454.659 


840,254 


71.6 


lO.O 


18.4 


1880 


4,008,907 


2,984,306 


322,357 


702,244 


74-5 


8.0 


17-5 


North Atlantic 
















Division. 
















1900 


677,506 


536,724 


66,361 


74,421 


79.2 


9.8 


II.O 


1890 


658,569 


537,376 


52,120 


69,073 


81.6 


7-9 


10.5 


1880 


696,139 


584,847 


49,011 


62,281 


84.0 


7.0 


9.0 


South Atlantic 
















Division. 
















1900 


962,225 


• 536,627 


172,699 


252,899 


55-8 


17.9 


26.3 


1890 


749,600 


461,057 


96,098 


192,445 


61.5 


12.8 


257 


1880 


644,429 


411,673 


74,946 


157,810 


639 


n.6 


24.5 


North Central 
















Division. 
















1900 


2,196,567 


1,583,841 


207,732 


404,994 


72.1 


7-5 


18.4 


'^9° 


1,923,822 


1,474,086 


147,248 


302,488 


76.6 


97 


157 


1880 


1,697,968 


1,350,225 


88,743 


259,000 


79-5 


5-2 


15-3 


South Central 
















Division. 
















1900 


1,658,166 


852,620 


286,091 


579.455 


514 


17-3 


31-3 


1890 


1,086,772 


668,972 


151,901 


265,899 


61.5 


14.0 


24-5 


1880 


886,648 


565.556 


105,092 


216,000 


63.8 


11.8 


24.4 


Western Division. 
















1900 


242,908 


202,596 


18,782 


21,530 


834 


7-7 


8.9 


1890 


145,878 


128,237 


7,292 


10,349 


87.9 


50 


7-1 


1880 


83,723 


72,005 


4,565 


7,153 


86.0 


5-5 


8.5 


Alaska & Hawaii. 
















1900 


2,285 


963 


1.255 


67 


42.1 


54-9 


30 



It would, however, be a mistake to assume that the tenants 
are growing at the expense of owners. Both owners and ten- 
ants are increasing, even though the tenants are increasing 



388 Rent. [§ 164 

faster. In 1900 there was one farm owned for every 14 
persons outside of cities of 8,000 inhabitants and over. In 
1850 the ratio of all farms of whatever description to the pop- 
ulation outside of such cities was precisely the same — i to 14. 
It is clear, then, the number of farms cultivated by the owners 
has grown faster than the non-urban population. This means 
that the increase of tenants has come not from previous farm 
owners or their families, but from previous farm hands or hired 
men. The growth of farm tenancy, therefore, is a step forward, 
not backward, in the condition of American agriculture. The 
burning problem in the South is whether the negro farmers 
possess or can be made to attain the qualities fitting them for 
successful tenant farmers rather than for laborers on the large 
plantations, which are again beginning to develop. 

164. Justification of Land Rent. 

The question of the justification of rent is one not of its ex- 
istence, but of its disposition. Since rent is as much a part of 
the product as wages, to query the justification of rent is in 
one sense as unmeaning as to query that of wages. The rent 
which a tenant pays is fixed by economic law ; whether he 
hands it to a private individual or to the government is imma- 
terial so far as its existence is concerned. The point at issue is : 
who should get the rent, the individual or the government. 

Private property in land rents is attacked from three sides. 
The communists assail it because they condemn all private 
property. The socialists assail it because they hold that the 
private control of any factor of production, except that of 
the laborer by himself, involves a robbery of the laborer. 
The land nationalizers and single-taxers assail it because of an 
alleged distinction between land and capital. Although the 
arguments of these three assailants are mutually destructive, 
we shall confine ourselves here to the last class, inasmuch as the 
arguments of the communists and socialists are not peculiar 
to property in land. 

According to the single-taxers land rent is held to be a 



§ 164] Justification. 389 

monopoly privilege, and land value is claimed to be a social 
product. For both reasons the land would then be unsuited 
to private ownership. 

In the first place, however, we have seen that monopoly can- 
not well be predicated of land in general. Worthless land 
exists in abundance. From the worthless to the priceless 
lands, however, there is a continual gradation, and it is impos- 
sible to say where relative abundance and competition stop 
and monopoly begins. Even, however, if the fact of privilege 
is substantiated, it is not competent to single out land. Many 
other privileges are granted by modern society. Patents and 
copyrights are exceedingly valuable, even if temporary, privi- 
leges. The institution of inheritance, whereby society confers 
upon individuals the right of receiving that for which they are 
in no wise responsible, is a privilege which in importance 
almost transcends that of property in land. Certain corporate 
franchises constitute privileges, the value of which may be 
only in part referable to the land. That all such privileges 
should be paid for is indeed a legitimate demand ; but to 
claim that this payment should be extended to the point of the 
total value of the land would logically lead to the similar claim 
that the total value of all inheritances, franchises, patents and 
copyrights should be taken by the state. 

Secondly, the assertion that land value differs from other 
values in that it is a social product involves the contention that 
the value of other things is an individual product. Individual 
labor, however, has never by itself produced anything in civil- 
ized society. Take, for example, the workman fashioning a 
chair. The wood has not been produced by him ; it is a gift 
of nature. The tools that he uses are the results of the con- 
tributions of others ; the house in which he works, the clothes 
he wears, the food he eats (all of which are necessary in civil- 
ized society to the making of a chair), are the result of the 
contribution of the community. His safety from robbery and 
pillage — nay, his very existence — is dependent on the cease- 
less co-operation of the society about him. How can it be 



39° Rent. [§ 164 

said, in the face of all this, that his own individual labor wholly 
creates anything? If it be maintained that he pays for his 
tools, his clothing and his protection, it may be answered that 
the land purchaser also pays for the land. Nothing is wholly 
the result of unaided individual labor. No one has a right to 
say, " This belongs absolutely and completely to me because 
I alone have produced it." All value is a social product. 

It may be contended, indeed, that the landowner does 
nothing, while the carpenter, at all events, does something. 
This can apply, however, only to the absentee owner of agri- 
cultural land or to the holder of city land. Under the modern 
form of corporate investment, moreover, even this distinction 
is robbed of much of its importance. Suppose that I invest 
my capital in land or in the shares of a street railway, a news- 
paper or a bank. At the end of ten years I return and find 
that land values have increased, but I also find that the 
same cause — the growth of population and prosperity — has 
equally enhanced the value of my railway, newspaper and 
bank stock. It is indeed true that the growth of the corpora- 
tion calls for a continually abler manager, but the only contri- 
bution that I personally have made to the increased value 
may be a chance vote by proxy for a new board of directors. 
To all intents and purposes the increment is well-nigh as 
" unearned " in the one case as in the other. 

It may nevertheless be conceded that there is a difference 
to this extent, that ultimately the ownership of the capital con- 
trols its management and conditions its most effective social 
utilization. This difference, however, does not suffice to con- 
vert all land values into " unearned increments " and to make 
the increased values of other things " earned." At best it can 
only justify a somewhat higher rate of taxation on land. The 
single-tax movement undoubtedly has a practical validity to 
the extent that it emphasizes the advantages of exempting cer- 
tain classes of personal property from taxation for local pur- 
poses ; but so far as it endeavors to abolish every other form 
of taxation, or so far as it purports to afford a solution of a 



§ 164] Justification. 391 

great social problem by confiscating land rents, it is sadly in- 
adequate. Private property in agricultural land has been 
developed in the course of long centuries as the most effective 
means of spurring on the cultivator to the best methods, and 
thus uniting individual and social interests. To distinguish 
between the social and the individual causes of agricultural 
rent is impossible. The validity of agricultural rents, however, 
involves that of other land rents as well. It is only when the 
control of land by individuals becomes a distinct menace to 
social interests that its rigid regulation, or even its assumption 
by the community, becomes legitimate. 



CHAPTER XXV. 
INTEREST. 

165. References. 

T. N. Carver, Distribution (1904), ch. vi ; J. B. Clark, Distribution (1899), 
chs. xii, xiii ; F. A. Fetter, Principles (1904), ch. xvi; A. Marshall, 
Principles (1898), bk. vi, ch. vi ; G. Cassel, The N'ature and Necessity of 
Interest (1903) ; E. v. Bohm-Bawerk, Positive Theory of Capital (trans, by 
Smart, 1891), bk. vii, and Recent Literature 07t Interest (trans, by Scott, 
1903) ; N. G. Pierson, Principles (1902), part i, ch. iv ; F. v. Wieser, Natural 
Value (trans, by Malloch, 1893), bk. iv; W. S. Jevons, Theoiy (1888), ch. 
vii ; H. Sidgwick, Principles (1883), bk. ii, ch. vi; A. W. ¥\ux. Principles 
(1904), ch. vi ; M. Pantaleoni, Pure Economics (1898), part 3, ch. iii; 
J. S. Nicholson, Principles, bk. ii, ch. xiii ; J. A. Hobson, Economics (1900), 
ch. viii ; H. R. Seager, Introduction (1904), ch. xiv ; G. Billeter, Ge- 
schichte des Zinsfusses im Griechisch-romischen Altertkzcm bis auf Justinian 
(1898) ; W. J. Ashley, English Ecoiiomic History (1893), II, ch. vi ; H. C. 
Lea, Ecclesiastical Treatmetit of Usury (Yale Rev., II, 1894); G. K. 
Holmes, Usury in Law and Practice (Pol. Sci. Quart., VII, 1892). 

166. Nature of Interest. 

To the ordinary man interest seems to be the payment for 
a loan of money, precisely as wealth seems to consist of a sum 
of money. In point of fact, however, interest is paid for the 
use of the capital which the money represents. It is the 
earnings or product of the fund of capital, just as rent is 
the earnings of the individual pieces of capital. Interest is 
commuted rent, or the calculation form of rent. Just as a 
business man must deduct the rent or royalty of some patented 
machine used by him before computing his profits, so, if he 
buys the machine outright, he must deduct the interest on 
the capital invested in the machine. Whether he uses his 

392 



§ i66] Nature of Interest. 393 

own capital or borrows it is immaterial ; in the latter case it 
is loan or contract interest, in the former it is natural or 
economic interest. The distinction is the same as that 
which we have learned between contract and economic rent. 
Whether he pays the interest to another in virtue of some 
contract or keeps it makes no difference. The amount of 
interest, however, is not the same thing as what is usually 
called the rent of the particular machine. For the fund of 
capital is represented by many other concrete commodities 
besides machines. Total interest is always total net rent ; 
that is, the total net product of the entire fund of capital must 
be the same as the total product of the aggregate of all the 
individual pieces of capital. But this is very different from 
saying that the interest on a thousand dollars is the same as 
the annual gross rent of a particular machine costing a thou- 
sand dollars. 

This is due to the fact that rents and capital values of single 
commodities are as different as the commodities themselves. 
They run through the whole gamut of value from zero to well- 
nigh incalculable sums. Capital, as a fund, on the other hand, 
is a unit. Pieces of capital are heterogeneous ; a fund of cap- 
ital is homogeneous. There is no rate of rents or of capital 
values ; there is a general rate of interest. Interest on a 
thousand dollars may be fifty dollars ; a machine and a horse 
may cost a thousand dollars, and yet they may rent for very 
different sums because of their unequal durability. If all 
concrete units of capital were alike in productivity and if 
there was no question of durability, rent would always be the 
same as interest. It is precisely because individual pieces of 
capital are not alike that rent differs from interest, although 
total rent must always equal total interest. 

The statement that capital as a fund is homogeneous must 
not be misunderstood. Two identical pieces of capital, let us 
say two machines, may yield very different products, because 
the one may be carefully looked after and the other badly 
neglected, In the same way equal amounts of capital may be 



394 Interest. [§ i66 

loaned to two persons, one of whom may be expected to repay 
promptly, while in the other case there may be a risk. Just 
as the two machines, although technically the same, are 
economically different, so the two individual sums of capital, 
although in one sense homogeneous because reduced to a 
fund of value, are yet economically and from the point of view 
of the lender different productive instruments or income-bear- 
ing agents. Actual interest rates on loans therefore fluctuate 
with the degree of security and the probability of repayment. 
Interest rates on land vary, for instance, with the ratio of the 
loan to the property. In New York City in 1905 a loan 
equal to one-half the assessed value of the land could be secured 
for four per cent, a somewhat larger sum for four and a half 
per cent, and about three-quarters of the value for five per 
cent. The rate of interest on bonds varies from slightly over 
two per cent on government loans to five, six or seven per 
cent on local or industrial paper of more doubtful security. 
When we speak of the fund of capital as homogeneous, we 
refer to the identity of potential use, not to the conditions of 
repayment. A study of the normal rate of interest is a study 
of natural interest, or the returns from the use of capital on 
the assumption of complete mobility, free competition and the 
presence of the economic motive. The fact that a person 
who has borrowed the capital and pocketed its earnings 
chooses not to repay all of it, will affect the rate at which that 
particular person or other persons of his class can in future secure 
a loan, but will leave untouched the normal rate of interest on 
good security. Risk causes a fluctuation from the normal rate 
of interest ; it does not affect the normal rate itself which is paid 
on capital when there is virtually no risk. So far, of course, as 
there is an element of risk in all human transactions, the cost of 
this minimal risk must be included in the rate of inter- 
est. But in ordinary " gilt-edge " loans this may be practically 
disregarded. 

Interest rates not only fluctuate on loans to different indi- 
viduals or classes, but vary in different sections or parts of 



§ 1 66] Nature of Interest. 395 

the same country. This is, however, so obviously an illus- 
tration of the fact that we are dealing with different markets as 
to need no further elaboration. A study of interest rates, like 
that of all other cases of value, refers to conditions in a given 
market. If the study discloses the general principles of value 
in a market, it will be adequate to explain the relative varia- 
tions in different markets. 

Another seeming exception to the principle that interest is 
the earnings of a homogeneous fund of capital is afforded by 
interest rates on "call loans " in financial centres, — that is, on 
loans which may be called or terminated at will, as opposed 
to ordinary time loans. The general rate of interest in New 
York may be four or five per cent, but in the parlance of Wall 
Street " money may be worth " on a given day only one or two 
per cent when " it is a drug on the market," and may at another 
time " be so tight " as to command an interest rate of several 
per cent a week or several hundred per cent a year. The 
explanation is not difficult. Interest in general is paid for a 
fund of capital, because that fund ultimately represents some 
concrete pieces of capital that afford a service. The manu- 
facturer invests the capital in new machines or buildings, the 
merchant in new facilities of transfer, the farmer in more 
land or better implements. In the case of Wall Street, how- 
ever, what is wanted is not capital for technical production, 
but capital in the form of liquid assets or a disposable surplus 
of cash to meet current liabilities. The ordinary rate of inter- 
est depends upon the demand and supply of capital for pro- 
ductive purposes ; the rate of interest on call loans depends 
on the demand and supply of the fluctuating mass of loanable 
funds which are on the instant convertible into cash. The 
rate of interest on call loans may be high when the general 
rate of interest is low. In the case of call loans the payment 
is for the temporary use of the money considered as a com- 
modity in itself; in the case of ordinary loans the payment is 
for the use of an aliquot part of the social capital of the 
community. For a fuller treatment of this point see § 222. 



39^ Interest. [§ 167 

167. Interest and Forbearance. 

We have learned that the real value of all things consists in 
their rents or actual uses and that the fundamental aspect of 
value is rental value. We have also learned that rental values 
are transmuted into capital values, and that capital value 
depends upon a succession of anticipated income or rental 
values. Finally, we have learned that this process of capitali- 
zation, or of estimating the present worth of a succession of 
future uses, depends upon the fact that men habitually put a 
lower present estimate on future uses than on present uses. 
Interest thus involves a discounting of the future and is a nat- 
ural phenomenon because it represents a natural discount. It 
corresponds to the difference in the time utility of things, as 
actual rents or usufructs correspond to differences in material 
utility. 

In the case of more or less durable articles of consumption, 
we can postpone or wait for each use or service as it recurs ; 
or we can dispose now of all its expected future uses by selling 
it outright. Obviously there is a disadvantage in waiting, 
because the present satisfactions that we could buy are more 
keenly appreciated than these future satisfactions. In paying 
us a capital sum, therefore, the purchasers or actual consumers 
will insist on a reward for their forbearance. We can invest 
the money in something that can be consumed at once ; they 
must wait for each recurring service or use of the commodity 
now in their possession. As the future changes into the pres- 
ent, each use of the commodity will afford them a definite 
satisfaction ; but at the present moment the actual value of 
each anticipated future use is somewhat smaller than will be 
the value of that use when realized. This difference or dis- 
count is the reward for forbearance, that is, for postponing 
present satisfactions. 

Articles of consumption, however, must be replaced. A 
stock of consumption goods can continue or increase only 
through the means of production goods. If things are used 



§ 167] Forbearance. 397 

for productive purposes, their capital value must be explained 
in the same way as that of consumption goods. The person 
who has created a piece of capital must be rewarded for his 
waiting. Instead of consuming everything now, he prefers to 
put a part of his energies into producing something which 
will last, and will help him in the future. He postpones his 
gratifications, he waits for the future rents or earnings of this 
thing that now has a capital value, because it capitalizes the 
anticipated rents or earnings. As these future earnings become 
with the lapse of time present earnings, they acquire a greater 
value, — greater by the amount that a present satisfaction ex- 
ceeds a future satisfaction. When a man puts his capital into 
a savings bank or into a business or into a concrete commodity, 
the aggregate of earnings or services as they mature exceed 
the present capitalized worth of those earnings. The capital, 
as it is said, will earn (in the future) a surplus over its present 
(capitalized) value. If he keeps the capital, this surplus will 
accrue to him ; if he loans it, the borrower must pay him the 
surplus which will have been earned by the time that the 
capital is repaid. If we own a boat and rent it out, it may 
bring in $150 before it is finally discarded after a dozen years; 
but if we sell it now it may fetch only $80. The difference, 
or $70, is the interest or surplus reward which accrues to us if 
we wait for the future earnings to come in. As the future uses 
or earnings ripen into present earnings, they acquire an enhanced 
value. 

To say, however, that interest is the reward of forbearance 
does not suffice. We must remember that all price depends 
on marginal utility. We are always comparing one kind of 
enjoyment with another, and the increments of satisfaction 
diminish with the supply until we reach a certain point or 
margin where the increment of satisfaction afforded by a given 
service or commodity is overtaken by that afforded by another. 
When, therefore, we compare present with future satisfactions, 
we are really comparing marginal increments of enjoyment. 
Our present estimate of each successive future use of a com- 



39^ Interest. [§167 

modity diminishes as that use recedes into the future ; but the 
extent to which we are wilHng to refrain from present con- 
sumption depends on the relative amount at our disposal. If 
we have a large quantity of a commodity or a large sum of 
money with which to buy it, we can consume only a small 
portion now, and may be quite ready to lay by the rest because 
it does not involve any perceptible sacrifice. With every 
diminution in the amount at our disposal, however, the greater 
will be the importance which we attach to present satisfactions, 
and the more remote will appear the advantage of saving for 
the future. Finally, a' point will be reached where these two 
considerations balance each other, and where we shall be on 
the margin of doubt whether to save or to spend. Beyond 
that point we shall surely not save, because we secure more 
satisfaction from present enjoyment. 

When, therefore, we say that interest is the result of forbear- 
ance, we really mean that interest is the result of marginal 
forbearance, or forbearance at the margin. The disadvantage 
of waiting, which is the essence of interest, is the disadvantage 
of waiting at the point where we get ready to substitute one 
kind of enjoyment for another. This marginal point will 
indeed be a different one for the rich and the poor, for the 
spendthrift and the miser, but this difference will affect the rate 
of interest as little as the relative wealth of the purchaser 
affects the price of wheat on the exchange. The value of 
wheat is the expression of its marginal utility to the wheat- 
using group ; the interest on capital corresponds to the difference 
in the marginal estimates of present and future uses for the 
whole capital-using group. Value in the market is social 
value (§ 74). 

Interest, then, is not simply the discount between present and 
future enjoyments in general. There would indeed be no 
capital if there were no saving, but all saving does not involve 
a sacrifice or disadvantage. People would save something 
even if there were no interest. A prudent man knows that 
he will need something for a rainy day; a far-sighted man 



§ i68] Interest and Productivity. 399 

may even believe that the future social demand for a commod- 
ity or service will grow, and he would then save or accumulate 
the particular capital even if there was no reward in the form of 
interest. For if he is right, it will be worth more to him in the 
future than it is at present. But when a man saves or accumu- 
lates capital, he would, if there were no interest, soon reach a 
point where his gains from accumulation would be overtaken by 
his loss in foregoing present enjoyments for future satisfactions. 
This would be the margin or final point where he would stop 
saving or capitalizing. Interest therefore is the discount 
between present and future marginal increments of enjoyment ; 
that is, interest is the measure of the marginal disadvantage 
of forbearance. 

Moreover, since at this margin men are constantly compar- 
ing the service of one commodity with that of another, interest 
is the return for awaiting not simply the future service of some 
particular piece of capital, but that of any other piece of capi- 
tal which may be substituted for it. In other words, the rate 
of interest depends on the difference between the actual 
estimate of the present and that of the future services of the 
whole mass of capital at the margin, that is, of the marginal 
increments of the entirety of capital. 

168. Interest and Productivity. 

It is obvious that unless a commodity afforded some services 
or earnings there would be no use in waiting and no advantage 
in forbearance. Instead of centering our attention upon the 
forbearance we may equally well turn our consideration to the 
future services which capital will yield. In lieu of looking at 
the problem from the point of view of waiting for the service, 
we may approach it from that of the capital which affords 
the service. As soon as we do this, we face the problem of 
productivity. 

Particular pieces of capital are undoubtedly productive. An 
axe enables us to secure a greater result than if we used our 
hands. A machine utilized by a laborer produces more than 



400 Interest. [§ i6S 

the labor alone could produce. If particular pieces of capital 
are productive, capital as a whole must be productive. If the 
commodity no longer affords a service, it will lose its value as 
a piece of capital, that is, it will no longer be capital. Con- 
versely, capital will be accumulated because of the earnings to 
be derived therefrom. When we speak of capital, we inevi- 
tably think of the earnings of capital. 

Owing to the law of diminishing returns, there is a limit to 
the proiitable use of particular pieces of capital. If a given 
force of workmen had previously used only their hands, and if 
a machine is introduced, like a loom, the product will be at 
once increased. If the single loom does not occupy all the 
time of the workman, more will be introduced, until with say 
ten looms each workman is fully employed. The addition of 
an eleventh loom will still increase the product, but the addi- 
tion will not be so great as before the point of maximum utili- 
zation had been reached, because the workman cannot tend 
each loom so carefully. A twelfth and thirteenth loom will 
add continually smaller products, until finally an additional 
loom will add nothing at all. Now, since every loom is as good 
as the other, the earnings or the productivity of each is at any 
given time measured by that of the last or marginal loom em- 
ployed. If there are ten looms, the contribution of each is 
equal to that of the tenth ; if there are thirteen, the contri- 
bution of each is equal to that of the thirteenth. The 
earnings of the marginal loom, that is, its additional con- 
tribution to the product, is its rent, and if the looms are hired 
from the owner, the money rent paid to him for each loom will 
be equivalent to the marginal earnings, that is, the earnings or 
contribution to the product of the marginal loom. If the 
entire capital of the community consisted of looms, the annual 
product of the looms would be the gross return of the capital 
invested in looms ; and this product, less the cost of repairing 
and replacement, would be at once the net rent and the 
interest. 

The total capital of a community, however, is composed of 



§ i68] Interest and Productivity. 401 

other things than looms. Capital as a whole includes all the 
concrete pieces of wealth. When we borrow a thousand dol- 
lars, we secure the opportunity of embodying that sum in any 
individual piece of concrete capital. That sum has a value 
because it is productive, in the sense that it can at once be 
incorporated into something that yields a product. Since indi- 
viduals are constantly competing for the privilege and are substi- 
tuting dififerent embodiments of that fund of capital according 
to their estimate of the returns to be derived, it is clear that 
at any moment the productivity of the entire mass of capital 
in existence is measured by that of the particular piece of 
capital at the margin of employment. It may be a loom or 
anything else. Productivity of the fund or aggregate of capi- 
tal means marginal productivity. 

This margin of employment, however, is not simply the 
margin of indifference as between various pieces or increments 
of capital ; it is also a margin of indifference as between the 
various productive factors in general. Owing to the same 
principle of diminishing returns, the United States Steel Cor- 
poration must continually consider whether it pays better to 
add another machine in a given mill or to burn more coal in 
order to speed the machines faster ; whether it is more advan- 
tageous to put additional capital into that particular mill or into 
the steamers which transport the product to the market. In 
the same way they must consider whether it pays better to 
crowd more machines into the same mill or to acquire more 
land and build a new mill. Finally, they must consider whether 
it pays better to increase the labor force for the purpose of 
getting more work out of the same machines, or to increase 
the number of machines. Every practical business man realizes 
that there is such a margin of indifference, beyond which an 
additional application of capital will not yield as great returns 
as an additional application of labor, or vice versa. 

What is true of the individual is equally true of society. 
The total capital in a given market is constantly competing 
with the total supply of other productive agents. The margin 

26 



402 Interest. [§ i68 

of employment which tells in the determination of the nor- 
mal rate of interest is a social margin. All the individual 
pieces of capital are reduced to terms of money, and the fund 
of capital in any market is the capital value of all the single 
pieces of capital. The marginal productivity of this fund of 
capital is the earning capacity of the increment embodied in 
the particular piece of capital employed at the margin. 
That particular increment of capital will yield a certain 
return, and that return or addition to the capital constitutes 
interest. 

When we have free competition and complete mobility of 
capital, any increment can earn only as much as the marginal 
increment, for, since they are interchangeable, any increment 
at a given time may be considered the last or final one. In- 
terest is the addition to itself which the capital in a given 
market earns at the point of marginal utilization. Interest, in 
other words, is the product of the marginal increment of 
capital. 

It makes, therefore, really no difference whether we say 
that interest is the measure of marginal productivity or the 
measure of marginal forbearance. They are two ways of stating 
the same fact, just as we know that the value of all things may 
be expressed in terms of marginal utility or of marginal sacri- 
fice. When we speak of the productivity of capital, we think 
of utility ; when we speak of forbearance, we think of sacrifice. 
Interest, like all value, may be explained in terms of one or of 
the other, for marginal increments of utility and of sacrifice 
tend to be equal. When, however, we say that the marginal 
increment of capital employed at any given moment yields a 
certain return, we must not forget that in a deeper sense it is 
not the piece of capital which creates the product or interest, 
but that it is the product or interest which is responsible for 
the capital. Capital value is the reflex of the value of the 
anticipated services. Capital is capitalized income. 



§ 169] Course. 403 



169. Course of Interest. 

Since interest is the measure of marginal productivity and 
marginal forbearance, the actual rate of interest depends on the 
location of the margin. Like every other margin, this is a 
result of an equilibrium or balancing of economic forces. 

It is obvious that in early stages of development the margin 
is high. There is a great scarcity of capital ; and it assumes 
the form chiefly of the rudest kinds of implements which cost 
but little time and labor to create. The margin of indifference 
is a high one, and therefore the marginal productivity of cap- 
ital, that is, the rate of interest, is high. 

As capital accumulates, the margin recedes. While the 
growth of capital augments prosperity, the product ascribable 
to each individual piece of additional capital is smaller than 
before. At the new margin where men are debating whether 
to spend or to save, whether to work for current needs or to 
work harder for future needs, the same result can be secured 
only by greater labor. The marginal piece of capital, in other 
words, has a lower productivity. The rate of interest falls, 
because the capital employed at the margin produces less for 
itself, that is, adds less to itself. The addition to itself at the 
margin is the rate of interest. 

In so far, hence, as progress means the continual multipli- 
cation and improvement of capital, it implies a steady reduc- 
tion in the rate of interest. Capital develops not only in 
quantity, but in quality. We have not only more pieces of 
capital, but better ones. The clumsy tools are replaced by 
fine machines, the log house gives way to the sky-scraper, the 
wheelbarrow to the electric locomotive. The total product, 
that is, the aggregate wealth of the community, augments, and 
there is such an increase in the number of increments of capi- 
tal that at the margin, where the final increment of capital is 
employed, the selling value of its product will be less than 
before. Prosperity depends upon total product, but value 
depends upon marginal product ; the marginal product of 



404 Interest. [§ 169 

capital decreases, while the total product of all the capital 
increases. The rate of interest falls because the margin of 
employment falls ; but as the margin falls, the quantity of 
capital grows, its quality improves and wealth increases. 

According to the recent researches of Billeter, the normal 
rate of interest on good security during the period of greatest 
prosperity in Athens was about 1 2 per cent ; while in Rome 
at the close of the republic it had fallen to between 4 and 6 
per cent. Starting in again during the early middle ages at 
a rate of 20 per cent and 15 per cent, it gradually fell, until in 
the great financial centres of Holland toward the close of the 
eighteenth century it reached a rate of between 2 per cent 
and 3 per cent. Since then the rate has again risen, for 
reasons to be mentioned in a moment. 

It would be a mistake to assume that the margin is fixed 
simply by the alternative returns from land. It is true that 
where land is abundant, and land rent therefore low, the rate 
of interest is high. It is equally true that one of the causes 
responsible for the rise of interest has been the opening up of 
vast stretches of cheap land in the New World. As the margin 
of cultivation moved outward, the same piece of capital 
applied to the land yielded larger results ; that is, the margin 
of the productivity of capital moved upward, and the rate of 
interest moved with it. But changes in the productivity of 
land are not the sole factor in affecting the productivity of, and 
therefore the demand for, capital. If labor should become 
less costly, the margin would also move up. Just as in the 
preceding case a unit of capital would produce more when 
applied to a given quantity of less expensive land, so now a 
unit of capital would produce more when used in conjunction 
with a given quantity of less expensive labor. The only differ- 
ence between the two cases is that the lower cost of land 
would mean a lower land rent, while the lower cost of labor 
might mean either lower wages or, when lower cost is due to 
greater efficiency, higher wages. During the past century, for 
instance, one of the reasons militating against a fall in the rate 



§ 170] Tendency to a Minimum. 405 

of interest has been the increased productivity of capital due 
to the lower relative cost of labor, whether the new capital has 
been used in Java with the low- wage peasant, or in America 
with the high-wage factory hand. The consideration of wages, 
however, must be deferred to the next chapter. 

The location of the margin may be affected not only by 
changes in the relative productivity of other factors of pro- 
duction, but by changes affecting capital itself. Continual 
improvements in capital undoubtedly increase general produc- 
tivity, but as qualitative improvements in pieces of capital are 
subject to the law of diminishing returns, their introduction is 
normally accompanied by a decline in the rate of interest. In 
Japan as in the Canadian Northwest interest rates are rapidly 
falling, although fresh land is scarce in the former, and abun- 
dant in the latter, country. In the same way the moving force 
may come from the side of demand or forbearance rather than 
of supply or productivity. The general state of society may 
affect the readiness to postpone present for future gratifica- 
tions. When the Filipinos complain of a scarcity of capital, 
they forget that the social and political conditions have been 
such as to discourage the sense of saving. The true educa- 
tion for the Filipino, as it is for the Negro, is to inculcate such 
habits of mind as to augment the readiness to forego present 
satisfactions. Whatever does this lowers the margin and leads 
to a fall in the rate of interest. 

170. Tendency of Interest to a Minimum. 

A gradual decrease in the rate of interest is normal as well 
as beneficial to the community. It lowers cost and enhances 
prosperity. It would, however, be an error to conclude that 
this tendency is constant, and that the interest rate will dis- 
appear or even reach a bare minimum. For, as the rate 
approaches a certain low point, it sets in motion forces to pre- 
vent any further reduction. This can be approached from two 
points of view. 

The first consideration is the unlimited potential capacity of 



4o6 Interest. [§ 170 

modern society to utilize capital. A low interest rate, say 
three or four per cent, is possible only in a community amply 
Supplied with capital. In such a complex society the demand 
for a greater control of the conveniences of life is virtually in- 
satiable, and individuals and government alike will be deterred 
from entering upon ever larger schemes of permanent im- 
provement and investment only by the consideration of cost. 
If the rate of interest should conceivably fall so low that the cost 
of capital might be neglected, it would lead to a well-nigh in- 
calculable multiplication of durable commodities. Every city 
would be pierced by innumerable subways, railroads would be 
more common than country paths, laborers would live in 
palaces and all other fairy flights of the imagination would be 
realized. This very statement is sufficient to show its absurd- 
ity. Capital could be costless only if the concrete pieces of 
capital cost nothing. But we know that while progress is con- 
stantly reducing the cost of some things, the fall in price en- 
genders a production of new things, previously non-existent. 
As long as human labor involves some sacrifice and human 
demands are illimitable, there will always be some things that 
cost labor. 

If individual durable things, however, cost something, capi- 
tal as a whole can never become costless, like air or water. 
The reduction in the cost of some forms of capital will at a 
certain point be balanced by the rise in the cost of new forms 
of capital which formerly did not exist and therefore had no 
cost. As long as invention keeps ahead of demand, cost will 
fall ; but with every reduction in cost demand increases, and 
when demand can no longer be satisfied by an increase in the 
supply, when, in other words, the law of diminishing returns has 
made its influence felt, any serious reduction in the aggregate 
cost of capital is impossible. Putting it in another way, we 
may say that after a certain point has been reached any addi- 
tional decline in the interest rate will mean a more than pro- 
portionate increase in the demand for capital, and this aug- 
mented demand which cannot be met by any corresponding 



§ i7o] Tendency to a Minimum. 407 

decrease in cost will prevent any further reduction in the 
rate. As capital becomes more abundant, its marginal pro- 
ductivity in terms of value will decrease, but the decrease itself 
will be arrested at a certain point. So far as experience seems 
to show, this point means a rate of between 2 per cent and 
3 per cent. 

The same result can be reached by approaching the problem 
from the other side, that of marginal forbearance. The readi- 
ness to accumulate capital depends on the comparison between 
present and future estimates. The accumulations of a very 
rich man as well as of a very poor man are apt to be. only 
slightly affected by an unduly low rate of interest, — the very 
rich man because he cannot well help accumulating, and the 
poor man because he has so narrow a margin for saving of any 
kind. In the case of the ordinary man, however, who is 
really responsible for the growth of capital, the matter is dif- 
ferent. It is not utterly arbitrary to assume that a man in 
moderate circumstances will commonly be willing to restrict 
his expenses and lay aside annually a sum about equal to that 
which he expects to enjoy as income in the future. The time 
required for accumulating a capital which will yield such an 
income will be, at 6 per cent interest, 12 years ; at 3 per cent, 
24 years; at 2 per cent, 35 years; at i^ per cent, 47 years; 
at I per cent, 70 years. ^ If the interest rate falls from 6 per 
cent to 3 per cent, the reward, even if smaller, will still be 
worth while, and in order to provide himself with an adequate 
income the individual may accumulate larger capitals than before. 
But if the rate falls to i ^ per cent he will seek to secure the 
future income in some other way without accumulating a cap- 
ital. Nowadays he would go to an insurance company and 
buy an annuity, and even if he wishes to purchase an annuity 
to last long enough to include the life of his children, the 
advantage of an annuity which at a high rate of interest is 
exceedingly slight becomes more and more substantial as the 
rate of interest declines. With a change in the above figures, 

1 Cassel, The Nature and Necessity of Interest, p. 146. 



4o8 Interest. [§171 

the conclusions will of course vary ; but in any event, taking 
the practice of the ordinary man, it is susceptible of a 
reasonably legitimate calculation that the rate of interest can- 
not fall much below 2 per cent, because otherwise the desire 
to accumulate would be effectually checked. While precise fig- 
ures are manifestly impossible, it seems that the margin which 
fixes the rate of interest thus stands in a close relation to the 
length of human life. If human longevity were to increase, 
the possible minimum in the rate of interest might be far lower 
than is likely to be the case under present conditions. 

171. Regulation of Interest. 

Interest therefore, like rent, is a natural phenomenon, which 
must exist wherever private property in durable quantities is 
found. Yet until recent times government has always attempted 
to restrict the rate of interest. 

At the outset, when the function of capital was not compre- 
hended, interest was considered a return for the use of money. 
Since the chief function of money was held to be its use as a 
medium of exchange, any compensation, other than the trans- 
fer of the thing exchanged, was deemed unjustifiable. The 
price of the use — the pretium usus — was usury, usura, and 
wholly indefensible. Usury and interest were synonymous, 
because the use for which a price was paid involved an in- 
terval of time " between " {interest) the loan and the repay- 
ment. Yet although seemingly unjustifiable, the exigencies of 
business life compelled the borrower to make some payment il 
he desired to induce the lender to part with his property. 
Public opinion began to recognize the legitimacy of some 
moderate return to the lender, primarily as a compensation 
for risk. The wedge was gradually pushed further in, until 
a distinction was drawn between the legitimate return, now 
called interest, and the illegitimate surplus known as usury. 
Legislation no longer prohibited all interest, but only ex- 
cessive interest. Yet the legal rate of contract interest was 
changed from time to time as the natural rate declined. 



§ i7i] Regulation of Interest. 409 

The development of modern capitalism and the recognition 
of the fact that interest is paid for the use of capital rather than 
for that of the money representing the capital, have led during 
the last half-century to the final stage, — the abolition of usury 
laws. The modern theory rests on the conviction that free- 
dom of loans enures to the interest of the borrower as well as 
of the community. To prevent the lender from securing 
the market rate is to curtail the offer of capital, to restrict 
the process of accumulation and to increase the price, 
open or secret, which the borrower must ultimately pay. With 
free competition and complete mobility of capital, which are 
the characteristic features of modern business life, the lender 
will get only what his capital actually earns ; the contract or loan 
interest will approximate the natural interest. The usury laws 
still found in some of the American states are an anachronism.^ 

It must, however, not be forgotten that this defence of free- 
dom in borrowing rests on the assumption which underlies all 
liberty, namely, relative equality in bargaining. Where the 
loans are for immediate consumption rather than for productive 
purposes, and where even in productive loans there is such a 
glaring discrepancy between the lender and the borrower that 
the former is able to take an unfair advantage of the latter, the 

1 England abolished the usury law on short-time commercial paper in 
1839, on all except real estate loans ifi 1S50 and on all loans in 1854. 
The other European countries, except France, followed during the next 
fifteen years. In the United States usury laws are virtually unknown in 
fourteen states — in nine of the Western states they never existed, in 
four of the New England states and in Louisiana they have been sub- 
stantially repealed. In the others usury is still illegal, with various pen- 
alties. In seven states the lender is disqualified from collecting the 
illegal excess; in nine the whole interest is forfeited; in four both princi- 
pal and interest are forfeited ; in three double the interest is forfeited ; in 
one three times the interest is forfeited. Most remarkable of all is New 
York, where the penalty includes not only loss of principal and interest, 
but also a fine of $1,000 and imprisonment for six months. This, how- 
ever, was so manifestly absurd, that in 1882 call loans of $5,000 and over, 
made on negotiable securities, were exempted from the law. In practice, 
of course, the penalty on all other loans is rarely enforced as to loss of 
jjri.icipal and virtually never as to fine and imprisonment. Corporations, 
moreover, are inhibited from availing themselves of the usury law as a 
defence. For some consequences of this system see § 223. 



41 o Interest. [§171 

reason of the rule falls away and some degree of protection 
may be needed for the borrower. This is recognized in the 
recent laws of both England and Germany, where provision is 
made for such exceptional cases.^ In the overwhelming ma- 
jority of instances, however, modern business loans rest upon 
the equality of business opportunity and the free competition 
of capital. Under such conditions usury laws are futile and 
worse than futile, because they either tend to evasion or 
become a drag on industry. 

1 The English act of 1900 permits the courts to -reduce the interest or 
other charges if satisfied that the charges are " excessive and that the 
transaction is harsh or unconscionable." The act applies only to 
'* money-lenders," excepting from the definition pawn-brokers, bankers, 
friendly, loan and building societies. 



CHAPTER XXVI. 
WAGES. 

172. References. 

^ J. B. Clark, The Distribution of Wnaltli (1S99), chs. vii, viii, xii, xxi, 
y and Essentials of Econotnic Theory (1907), chs. xiv, xv, xvi, xvii, and 
/ xxv; F. A. Fetter, Fri?iciples (1904), ch. xxiii ; T. N. Carver, Distri- 
bution (1904), ch. iv; A. Marshall, Principles (1898), bk. vi, chs. iii-v; 
F. A. Walker, The Wages Question (1876), part i, ch. viii, and part 2; 
H. R. Seager, Introduction (1904), ch. xiii ; N. G. Pierson, Principles 
(190?), part I, ch. vi ; A. T. Hadley, Econo7nics (1S96), ch. x ; J. S. Nichol- 
^ son, Principles\\'6^y-\.<^o\), bk. ii, chs. x-xii, bk. iv, ch. vii ; and Machinery 
and Wages (1S92), ch. i, and Summary; A. W. Flux, Principles (1904), ch. 
viii; W. S. Jevons, Theory (1888), chs. v, viii; W. Smart, Studies in 
Economics (1895), ^^s. i-iv; J. A. Hobson, Econofnics (1900), ch. vii; 
M. Pantaleoni, Pure Economics (1898), part 3, ch. v; H. Sidgwick, Prin- 
ciples (1883), bk. i, ch. viii; F. W. Taussig, Wages and Capital (1896); 
J. Davidson, The Bargain Theory of Wages (1898); H. M. Thompson, 
/ Theory of Wages (1892); S. and B. Webb, Problems of Modern Industry 
(1898), ch. iii; T. N. Carver, Distribution of Wealth (1904), ch. iv ; 
y^ A. Marshall, Principles (1907), bk. vi, chs. iii-v. 

173. Nature of Wages. 

Wages are the remuneration of labor. They are paid for 
the services of human beings, as rents are paid for the services 
of things. When we contrast wages with prices, we use the 
latter term in the sense of the capitalized value of commodities ; 
but if by price we mean value in the market, wages are a price 
just as rent and interest are prices. The law of wages must 
be like that of rent and interest, for the law of all price is the 
same. 

Wages, however, differ in some respects from rent and in- 
terest. Interest is the price paid for the use of an aliquot 
part of a homogeneous fund, and the small discrepancies in the 

411 



41 2 Wages. [§ 173 

interest rate at any given time and place are due to the element 
of risk. Net interest is always the same in a given market. 
Wages, however, vary with the kind of labor. The wages of 
the skilled workman are higher than those of the unskilled ; 
the wages of the foreman shade into the salary of the manager. 
Interest is homogeneous, wages are heterogeneous. On the 
other hand, wages differ from rents. Rents vary from zero to 
prodigious sums : the rent of a leased railroad may be millions 
of dollars, the rent of a worn-out row-boat may be next to 
nothing. The rents of some things may approach the vanishing 
point either because the things themselves are from the start 
of extremely little use, or because the originally valuable 
things are now fit only for the scrap heap or the junkman. 
Human beings, on the other hand, must live. The recom- 
pense of labor must be large enough to enable the workman 
at least to exist. Wages therefore cannot fall below a positive 
minimum which is absent in the case of commodities. More- 
over, while wages are paid for mental as well as for physical 
work, the socially significant problem of wages is that of the 
manual laborers, and with them the gradations in labor are 
slight compared to those in the great mass of commodities. 
Hence, while the assertion of a general rate of rents is un- 
meaning, we do speak of a general rate of wages. It is not a 
general rate in the sense of a general or single rate of interest. 
But it is general in the sense that it varies comparatively little 
as between a substantial minimum for the bottom grade and a 
not very much greater return for the higher grades of those 
laborers whose numbers are of importance. Wages therefore 
in their social significance occupy a position midway between 
homogeneous interest and heterogeneous rents. In one sense 
wages vary like rents ; in another sense there is a rate of 
wages like a rate of interest. 

There is still another sense in which we can speak of a gen- 
eral rate of wages. When values are measured in terms of 
money, we use the term general level of prices. Wages as 
well as prices may be high or low. This connection between 



§ 173] Nature of Wages. 413 

wages and money leads to a distinction of some importance ; 
namely, between money wages and real wages. Money wages 
are actual wages paid in money ; real wages are the actual 
commodities that the money wages can buy. If prices of 
food, clothing and shelter rise faster than the price of labor, 
real wages will fall although money wages rise. The em- 
ployer's interest is in money wages ; the laborer's interest is 
in real wages. The employer compares what he pays with 
the product ; the laborer compares what he receives with his 
expenses. 

Wages, again, although they are undoubtedly prices, may 
yet be usefully contrasted with the prices of things. Labor is a 
commodity in the sense that everything which has a price is a 
commodity. Labor, however, is a peculiar kind of commodity. 
The chief peculiarities are four in number, (i) Commodi- 
ties are produced for the sake of the services which they 
render. The increased supply of human beings is not due 
to any such consideration. Under slavery, where a man was 
a thing, human beings were kept for breeding purposes ; but 
in a state of freedom this consideration disappears. It is 
true, as stated above (§ 26), that the poor often look forward 
to their children as so many additional supports to the family. 
But he would be rash indeed who vvould assert that this is 
the motive of the increase. Commodities are produced for 
certain ends; human beings are ends in themselves. (2) A 
commodity once in existence continues to give its services 
unbidden ; a laborer may work or not, as he lists. The com- 
modity takes no holiday and does not strike. The mule and 
the slave respond to the lash ; harsh treatment of the work- 
man may diminish rather than augment output. (3) Labor 
is perishable, while many commodities are durable. After the 
lapse of a certain time the laborer must sell his labor or starve. 
Laborers and capitalists need each other, but under normal 
conditions the need of the laborer is more urgent. (4) Finally, 
labor is inseparable from the laborer, while the commodity 
may be separated from its owner. Commodities are sold 



414 Wages. [§ 174 

wherever the owner desires ; labor can be sold only where the 
laborer is. The owner of commodities may stay where he 
likes and send his commodities where he finds a market ; the 
laborer must accompany his labor to the market. The one 
is in this respect free, the other unfree. 

It is therefore not necessary to resort to obvious ethical 
considerations in order to recognize the difference between 
human beings and inanimate objects. The economic contrast 
is a result of man's personality, but it is none the less an 
economic contrast. The service of a material good is a com- 
modity, and the good itself is wealth ; the labor of man is a 
commodity, but man himself is not wealth. The things exist 
for the services which they afford, but man does not exist for 
wealth ; wealth exists for man. The price of labor, like the 
price of everything else, is the result of economic forces, and 
of economic forces alone ; but labor is such a peculiar kind 
of commodity that the economic forces are present in different 
proportions and thus affect the result differently. 

174. "Wages and Cost. 

After these preliminaries we are prepared to attack the 
problem of the law of wages. The most common statement is 
that wages depend upon supply and demand. In the sense 
that all value depends upon the equilibrium between supply 
and demand, this is true enough ; but unless we analyze the 
forces affecting normal supply and demand, the statement is of 
little use. In the way in which it is usually framed, moreover, 
the assertion leads to false implications. When the ordinary 
man speaks of demand and supply in reference to labor, he 
thinks only of the market variations rather than of the point 
about which the actual rates oscillate. Demand and supply, 
as commonly understood, afford a proximate rather than an 
ultimate explanation. As soon, however, as normal demand 
and supply are meant we are confronted by other causes. 

The earliest attempt to supply this more ultimate explana- 
tion was the cost, or cost of production, theory of wages. 



§ 174] Wages and Cost. 415 

Market value, it was said, depends upon demand and supply, 
but in all reproducible commodities normal value is fixed by 
cost of production. Labor is a reproducible commodity, and 
therefore its value must be fixed by its cost of production. 
The cost of production of labor, however, is the cost of per- 
petuating a supply of laborers. Since the only restriction on 
population was supposed to be the bare possibility of support- 
ing life, it was held that the supply of laborers would increase 
up to this point of the minimum of subsistence for each. The 
rate of wages, therefore, always tends to be at the bare 
minimum of subsistence, and the cost of production theory 
becomes equivalent to the minimum of subsistence theory. 
Sometimes this is also called the iron law or the brazen law of 
wages, because of the assumed rigidity of the principle. 

This theory was defective in two points. In the first place in 
its identification of labor with a simple reproducible commodity 
it neglected the possibility of such an automatic check to 
population as would in any progressive community result in a 
certain higher level below which labor will not be carried on. 
Secondly, it committed the error, common to all the early 
economists, of holding that price is fixed by cost of production, 
whereas we know that the relation is more indirect. In the 
face of the constant rise of wages during the nineteenth century 
coupled with a still greater increase of population, the mini- 
mum of subsistence theory of wages finally broke down. 

A variation of the same doctrine was the wages-fund theory. 
This rested upon the three premises, first, that wages are paid 
out of capital ; second, that the amount of capital available at 
any given time for such payment of wages is predetermined 
and fixed ; third, that the greater the number of laborers, the 
smaller the share of each. The conclusion was that since 
laborers can influence only their own numbers and not the 
predetermined amount of capital, all independent efforts to 
improve their position by collective action are futile : the 
sole method for the laborer to increase wages is to keep 
down population. Any interference, moreover, on the part of 



41 6 Wages. [§175 

government with the profits of capital will diminish the wages 
fund and thus decrease wages. As one of the more popular 
writers put it : " Labor is a commodity. If men will marry 
and bring up children to an overstocked and expiring trade, 
it is for them to take the consequences. If we stand between 
the error and its consequences, we stand between the evil and 
its cure ; if we intercept the penalty, we perpetuate the sin," 

Further reflection showed, however, that each of the three 
premises of the wages-fund doctrine was vulnerable, (i) 
Wages are not paid out of capital ; they are only advanced out 
of capital. They are paid out of the product. Labor, like 
capital, earns its own remuneration. They may co-operate to 
effect a certain result, but the wages are not paid out of the 
capital in any different sense than the interest or profits are 
paid out of the labor. Both are paid out of the joint product 
which they create. (2) There is no such rigidity in the avail- 
able amount of capital as is assumed. The capital applied to 
production is as susceptible of increase as is the labor force. 
J Both are at any given moment elastic quantities. Increase 
the remuneration of either, and the supply will grow. (3) 
Finally, to affirm that the rate of wages is a quotient to be 
arrived at by dividing the dividend or wages fund by the divisor 
or number of laborers, and that wages hence rise or fall merely 
with the changes in population, rests not only on the error 
of considering the dividend as fixed, but upon the neglect to 
remember that the laborers make a contribution to the product 
and thus increase the sum to be divided. 

With the breakdown of both the minimum -of- subsistence 
and th<i wages-fund theory of wages the way was prepared for 
the modern doctrine. 

175. Wages and Efficiency. 

In order to reach a consistent theory of wages we must 
revert to fundamental principles. All things possess value 
because of the services which they render. The value of all 
production goods depends on the value of the consumption 



§ 175] Wages and Efficiency. 417 

goods. If the price of iron products falls, the price of iron ore 
will fall. Production goods, however, are composed not only 
of concrete objects but of labor. Labor, therefore, has a value 
because its services or products have a value. If the labor is 
misspent, the product is valueless, and in the long run the 
labor will be equally so. Labor secures a remuneration because 
it produces something for which people are willing to pay. 
In other words, wages depend on productivity. 

The value of labor, however, like the value of all things, is 
affected by marginal increments. If a man applies his labor 
to land which is so abundant that it can be had for the asking, 
there will be no rent of the land, and the value of the entire 
product will consist of wages. By increasing the number of 
workmen, the product may be more than proportionately in- 
creased, because the plot may be large and several laborers in 
co-operation may accomplish so much better results that the 
share of each will be greater. After the point of maximum 
utilization has been reached, however, the law of diminishing 
returns will assert itself, and each additional laborer will add 
relatively less to the product, until if the process were con- 
tinued long enough a new laborer would make no addition at 
all. The process will never actually be carried to this point, 
since the object of activity is the attainment of some result ; 
if there is no result, • the activity will cease. At any given 
time, however, there is always a final or marginal workman 
who is making some contribution to the product. If there is 
free competition and if all the laborers do their allotted task 
equally well, so that there is no choice between them, the 
share of the product ascribable to any of the workmen must be 
equal to the additions made by the last or marginal laborer 
actually at work. Since the value of the entire product is here 
due to labor, the rate of wages is equal to the product of the 
marginal laborer. Wages depend upon marginal productivity. 

If, instead of operating with a given piece of land, the 
laborer were to utilize a given quantity of capital, the result 
would be. the same. Suppose that the labor is applied to a 

27 



41 8 Wages. [§ 175 

given quantity of looms. The total product here indeed is 
not wholly due to the labor, because the looms cost something, 
whereas the land was so plentiful that it cost nothing. The 
share of the product due to the looms, however, is equivalent to 
the interest on the capital invested. If the number of looms 
remains fixed and there are no changes in the demand, each 
additional workman will add an increasingly smaller increment 
to the total product ; and the share of the product at any given 
time due to the labor will, as before, be equal to the contribu- 
tion made by the workman that is employed at the margin. 
What he earns sets the standard for all the others. 

In actual life, indeed, the quantities of land and capital are 
fixed just as little as is the number of laborers. The marginal 
employment of laborers will therefore depend not alone on the 
amount of labor, but on the amount of the other productive 
factors. For these are all competing with each other. At a 
certain point in the process of increasing the number of 
workmen on a given plot of land it will be more profitable to 
use more land instead of more workmen ; and as the better 
land acquires a value, a part of the product will consist of land 
rent. In the same way at a certain point it will pay better to 
use more looms, so that an increasing part of the product will 
consist of the rent of the looms or of the interest on the capi- 
tal invested in the looms. Since the looms occupy space, the 
product will be divided into land rent, interest and wages. 
And if there are continual temporary changes going on, a part 
of the product will take the shape of profits to the entrepreneur. 
All this, however, although it may obscure, cannot prevent, the 
fact that there is always a point of marginal employment of 
labor, and that at this margin there is a certain part of the 
product ascribable to labor. The normal rate of wages, that 
is, the amount to which wages tend to conform under conditions 
of free competition and mobility of both capital- and labor, 
is the amount of value which a given increment of labor 
produces at the margin. 



§ 176] Rate of Wages. 419 

176. Rate of Wages. 

It may be claimed that the productivity of anything at the 
margin depends on relative scarcity. Scarcity, however, con- 
notes supply, and the supply of labor, like that of other things, 
depends on cost of production. Are we not then, after all, 
really coming back to the cost theory of wages? 

The cost theory, however, can no longer be stated as the 
minimum of subsistence theory. The cost of living at any 
given time is affected by the standard of life. With the pro- 
gress of civilization and the alteration of human wants, the stand- 
ard changes. The standard of the Chinese coolie differs 
from that of the American workman ; the standard of the farm 
hand from that of the factory operative. When the cost theory 
of wages is couched in terms of the standard of life theory it 
loses its pessimistic connotation. For if wages vary with the 
standard of life, anything which lifts the standard will raise the 
rate of wages. 

In reality, however, the standard of life cannot accomplish 
the impossible. The highest standard will not prevent wages 
from falling in the face of a decrease in the demand for the 
product and a decline in industrial prosperity. If the em- 
ployers cannot sell their product at a given price, they must 
lower cost or abandon the business. From this point of view 
the cost of labor is like the cost of anything else ; it must 
adjust itself to the price. As was said by Longfield three- 
quarters of a century ago, the wages of the laborer depend 
upon the value of his labor and not upon his wants. 

The standard of life theory and the productivity theory may 
thus be declared complementary. They are both true in the 
sense that the cost and the utility theories of value are true. 
But while marginal utility tends to equal marginal cost, we 
know that the ultimate explanation of value is to be found on 
the side of utility and that marginal cost adjusts itself to mar- 
ginal utility. Cost seems to be the cause of value, but is in 
reality a measure rather than a cause. So, in the same way, 



420 Wages. [§ 177 

marginal productivity (that is, marginal efificiency or utility) 
is the causa causans of the rate of wages, while the standard of 
life (or marginal cost), which seems to be cause, in reality 
adjusts itself to the productivity. The rate of wages may 
be expressed in terms of either, but the positive force is 
productivity. 

The standard of life, however, is of exceedingly great im- 
portance. It often serves as a dyke to prevent for a time at 
least the inundation of the field. It is here that the contrast 
between men and things is apparent. With ordinary com- 
modities, a new-comer who can produce the same goods at 
lower cost will reduce the price. With labor, if the cost, that 
is, the standard of life, has become a customary one, the new- 
comer will not be so apt voluntarily to submit to a lower stand- 
ard. To the ordinary producer low cost of the product means 
high gains ; to the laborer low cost of the product, that is, low 
wages, means low gains. It is only where the new-comers are 
habituated to a lower standard and where the exigencies of the 
situation force them to accept the smallest sum the employers 
will give, that the real difficulty arises. Thus women's wages 
are frequently lower than men's, not only because in some oc- 
cupations women produce less than men, but also because, even 
where the product is the same, the woman's standard of life is 
lower, in that she is generally not the support of the family 
and is often not entirely dependent on her earnings. In the 
same way the immigrant receives lower wages than the native 
workman, not only because his contribution to the product is 
frequently less through ignorance or lack of skill, but because 
his standard of Hfe is so much lower that he will be willing 
to work for less — at least until he becomes educated up to 
the new standard of life. 

177. Course of Wages. 

Since wages are fixed by the value of the marginal incre- 
ment of labor employed, changes in the normal rate of wages 
depend upon changes in the location of the margin. These 



§177] Course of Wages. 421 

changes may take place on the side of. labor or on that of the 
other factors of production. 

Anything which tends to enhance the productivity of labo" 
in itself will increase the product of the marginal unit and thus 
raise the rate of wages. Education, the development of mental 
and moral vigor, energy and application — in short, all those 
quahties which differentiate advanced from low-grade com- 
munities — tend to raise wages because they increase product. 
So far as governmental action or labor organizations succeed 
in lifting this plane of efficiency they also contribute to the 
rise of wages. From this point of view the standard of life 
acquires an additional significance, because of the reflex action 
of the standard itself upon the efficiency of the laborer. The 
better the man, the more valuable his work. On the other 
hand, the margin may be affected by changes in the other fac- 
tors of production. For instance, when land is relatively 
plentiful as compared to labor, the margin is high. In all new 
countries land rent is small, population sparse, and the return 
to labor abundant. In proportion as land becomes scarcer or 
less fertile, wages tend to fall relatively to land rent. Per 
contra, when new sections are opened by colonization or 
immigration, the tendency is for rent to fall and wages to 
rise. If land were the only other factor to be considered, 
it would be true that land rent tends to rise at the expense of 
wages. 

Land, however, is not the only factor. As the supply of 
capital becomes more copious, the joint product of capital and 
labor rapidly increases. With the growth in the supply of 
capital the rate of interest tends to fall. When the rate 
becomes as low as in modern industrial communities, there is 
such a perpetual and prodigious renewal and multiplication of 
capital that the productivity of the marginal laborer will con- 
stantly augment. Instead of working with no tools or poor 
tools, he will have at his disposal ever better implements and 
finer machinery. Yet these better tools and finer machinery 
will cost constantly less. The product will be larger, and the 



422 .Wages. [§ 178 

part of the joint product to be ascribed to capital will be rela- 
tively smaller. Wages, in other words, will tend to rise. 

Where both these forces operate simultaneously the result 
depends on their reciprocal influence. In early stages of eco- 
nomic development, as in some of our Western states, both 
wages and interest fall while land rent rises. In the older 
and industrially progressive sections, on the other hand, the 
increase of capital may overbalance the relative scarcity of 
land, and although land rent will rise, the total product will 
increase so much more rapidly that wages will rise as well. 
Wages in the great industrial establishments of New England 
have increased during the last half-century, despite the growth 
of land rents. Capital tends to raise the marginal contribution 
of the laborer, because it adds to his efficiency, that is, to his 
control of the powers of nature. 

There exist in all the important countries ample statistics to 
show the advance in real wages since the early stages of the 
capitalist system. We shall content ourselves with reproducing 
in the table on page 423 the figures for the United States since 
the civil war. These disclose the striking fact that real wages, 
that is, the amount of commodities that can be bought with the 
money wages, have risen more than 100 per cent in industry 
and more than 70 per cent in agriculture. In other words, 
notwithstanding the practical exhaustion of the free lands and 
the rise in land rents, wages have increased so that the labor- 
ers enjoy a continually greater command over the conveniences 
of life. There could be no more eloquent testimony to the 
power of the modern industrial system to enhance the welfare 
of mankind. We also add (opposite page 422) a chart show- 
ing the relation of wages to hours of work in the United States 
as compared with prices of food, since 1890. 

178. Variations in "Wages. 

Actual wages differ from normal wages thus far considered 
in three respects. The variation may be due to market in- 
fluences, to the nature of the occupation, or to the conditions 



>1!J 

< 3 


sl|ISSS|§§SI§iS SSsSilsll"^=^ 


OS 

o 

cr 

< 

UJ 

1 

g 
i 

1 












































































\ 


\ 
























































\ 


\ 


s. 






















































) 


\ 


































UJ 

1- 
< 

Si 

z II 

Ol 

oo 
r^ *" 

?? 

°i 

. u. 
u. > 

Uji 

> 

1- 
< 

_J 

UJ 
















\ 


















































\ 


\ 


















































\ 


\ 


















































\ 


V 
















































\ 


\ 


















































\ 
















































] 


\ 
































































WAGES 

HOURS OF WORK 
NUMBER OF EMPLOYEES 
RETAIL PRICES OF FOOD 


















































































\ 














































1 


) 




































































































\ 




















































































































Ld CO 
> UJ 
H CC 
< D 

UJ ii 


^s^sSisgigiiliSSSSSiiiil"^^ 



§ 178] 



Variations in Wages. 



423 



MOVEMENT OF NOMINAL AND REAL WAGES, 1866-1903 
(1S90 AS THE STANDARD YEAR). 





"'>; 


ae 


■gl 








to 


„ 


is 




S ^ 

'as 


^^ 


■m 


11 




11 


^^ 


■Pj 


|i 


rS 


^1 


IS" 


c n 
^ 5 ° 


^-^f 


n 


^^ 


^-, >^ 


s « 
'z i^ ° 


"sJ-s 


> 


«- 


« 3 






>! 




(2j 

1) c 


^■3| 






> ^ 
13 


^1 


« re 
■Ufc. 






re 

(5 




■5 £ 

"it. 




Falkner's Index 
Nos.i 






1884 


98.5 


90.0 












1885 


97.8 


98.2 


99 


I 


99.5 


1866 


68.5 


47-9 


ioo.o3 


70.0 


1886 


97.8 


98.1 








1867 


73-7 


56.0 






1887 


98.6 


97.8 








1868 


72-3 


53-9 






1888 


99.2 


96.6 


99 


3 


96.7 


1869 


7S.2 


52-7 


98. 


81.8 


1889 


99.6 


94.8 










25 Occupations.^ 








Bureau of Labor,* 








City Wages. 








519 Occi 


ipations. 






1870 


87.3 


68.7 






i8go 


lOO.O 


1 00.0 


lOO.O 


100.0 


1871 


94-7 


72.2 






1891 


99-7 


98.4 








1872 


97.0 


74.9 






1892 


100.3 


100.8 


100 


7 


101.2 


•873 


93-2 


76.3 






■893 


100.2 


98.3 


106 


7 


104.7 


1874 


9... 


73-2 






1894 


96.7 


99-4 


97 


7 


100.3 


.875 


88.7 


72- S 


90.8 


74-3 


1895 


97-4 


102.0 


96 


5 


lOI.O 


1876 


86.3 


74-4 






1896 


98.5 


105.7 


.. 






1877 


88.8 


77-8 






1897 


98.2 


104.5 








1878 


913 


82.9 






1898 


99.0 


102.7 


107 


9 


III. 9 


1879 


91.8 


90.5 


83'.8 


82.6 


1899 


100.2 


103. 1 


"3 





116.3 


1880 


92.6 


82. 8 






1900 


103. 1 


104.5 








1881 


95-3 


82.4 






1 901 


104.8 


102. 1 








1882 


96.9 


83-3 


99-7 


85.V 


1902 


108.2 


1 00.0 


131 


7 


121. 6 


1883 


97-7 


85.9 






1903 


III. 2 


103.2 







1 Unweighted averages of wages in 21 industries, from Senate 
(Aldrich) Report on Wholesale Prices, Wages and Transportation, p. 180. 
All wages in this table are on the gold basis, and all real wages down to 
1S89 are based upon Falkner's weighted index numbers of prices, from 
the same report, p. 100. The meaning of the terms weighted and un- 
weighted are explained below (§ 195). 

2 Unweighted averages covering 12 important cities, from Bulletin of 
the Department of Labor, No. 18, p. 669. 

^ Weighted averages of monthly wages, reduced to gold basis, com- 
piled from Bulletin No. 26, miscellaneous series, United States Depart- 
ment of Agriculture, p. I5- 

* Weighted averages of weekly earnings from Bulletin of the Bureau 
of Labor, No. 53, pp. 721-723. All real wages from 1S90 to 1903 based 
upon index numbers of retail prices given in this bulletin. 

This table is taken from Adams and Sumner, Labor Problems (1905), 
514. It is selected as, on the whole, the most accurate and conservative 
presentation of the facts. The authors give several warnings as to the 



424 Wages. [§ 178 

of equality as between the giver and the recipient of wages 
in the same occupation, 

(i) Market variations need not detain us long. Like all 
market prices, wages in every-day life are the result of ephem- 
eral changes. While of the utmost importance to the prac- 
tical business man, the market oscillations do not lend 
themselves to any detailed analysis. In brisk times, when the 
temporary demand increases faster than the supply, wages 
advance and vice versa. Farm hands secure higher pay at 
harvest time ; factory operatives must choose between lower 
wages or less work during a period of great temporary depres- 
sion. These facts are so obvious as to need no elaborate 
explanation. 

(2) The inequalities may be due to the occupations them- 
selves. We do not here indeed deal with market wages, but 
the wages are normal only within each occupation. They are 
particular normal wages, not general normal wages. Some- 
times the inequality is more ostensible than real. The sea- 
sonal demand may differ. In the wholesale clothing trade the 
two busy seasons are followed by the slack months ; the brick- 
layer can ply his vocation only in favorable weather. The 
rate of wages for permanent workmen must be such as to 
equalize these differences. The high nominal day wages of 
the bricklayer may be far lower real monthly wages ; the high 
weekly or monthly wages of the clothing " operator " during 
the busy season may be only moderate real yearly wages. 

Adam Smith attempted to reduce the inequalities in wages 

use of the table : (i) In the industrial group, the figures are the results 
of three distinct investigations. The averages are not absolutely com- 
parable. But the probable error is slight. {2) Up to 1889 the compar- 
ison is with wholesale prices, after 1890 with retail prices. The effect of 
this is probably to exaggerate the relative advance of real wages for the 
earlier period. (3) Statistics of real wages are really trustworthy only in 
periods of normal prosperity. In time of depression, prices fall more 
quickly than wages, so that real wages seem to be increasing when in 
reality there is much more unemployment and a decline in the welfare of 
the laborers as a whole. Thus in 1896 the real wages seem to be higher 
than m 1892 or 1902. 



§ 178] Variations in Wages. 425 

to five causes : the agreeableness of the occupation, the con- 
stancy of employment, the ease of learning the trade, the degree 
of trust to be reposed in the workman, and the probability of 
success. In a more general way, however, it may be said 
that inequality of pay is due to inequality of work. A watch- 
maker gets more than a street-sweeper because his contribu- 
tion to the product is greater. If all units of labor were at 
least potentially equal, and if there was complete mobility, the 
street-sweepers would all become watch-makers and wages 
would stand at a level. Obviously, however, the higher the 
degree of required skill, the greater the relative scarcity of 
workmen. This scarcity may be due to four causes : a defi- 
ciency of natural talent, a lack of opportunity, the cost of 
mastering the trade, and the obstacles in the way of move- 
ment from employment to employment. The differences 
between occupations may thus be either natural or artificial ; 
in either case the labor force is at any given time divided into 
what are in some respects at least non-competing industrial 
groups. 

(3) Finally, the discrepancy between normal and actual 
wages may be due to conditions of inequality. This may be 
ascribable to the fact that there is only one-sided competition, 
or that the conditions of the mutual competition are different. 
There may be a monopoly on the labor side. If any group of 
workmen can secure such a complete control of the trade that 
it need fear no entrance of undesired members, it can raise the 
rate of wages considerably above the normal point. In rare 
cases only is this possible on a large scale in modern times. 
When the workmen are not securely intrenched by legal priv- 
ilege, as in the later stages of the mediaeval guilds, a rise of 
wages far above the normal level in any one occupation will 
set in motion forces which will ultimately be strong enough to 
break down the artificial barriers. If the group is unduly re- 
strictive in its membership, the pressure from the outside will 
result in the formation of analogous groups, anxious to partici- 
pate in the extra gains, and ready to take over a share of these 



426 Wages. [§ 178 

gains. Minor instances, however, of this temporary monopo- 
listic excess of wages are by no means infrequent. 

On the other hand, competition may be absent on the side of 
the employers. Capital monopolies, however, have even less 
opportunity of driving wages down below the normal level 
than labor monopolies have of raising them above the level. 
For even though there may be no competition within the par- 
ticular industry, there will always be the competition between 
different industries for a supply of workmen. The laborers 
are not compelled to enter the employ of the monopoly, and 
will not do so when the wages offered are lower than in similar 
occupations. In point of fact, capital monopolies do not pay 
lower wages. The American workmen in their official unions, 
as we have seen, are not opposed to the monopolies and trusts 
on the score of low wages. The really perilous effects of capi- 
tal monopoly on wages is of a more insidious kind. All mo- 
nopoly means a relative restriction of production, for the point 
of maximum monopoly revenue does not necessarily correspond 
to that of maximum competitive output and marginal competi- 
tive cost. Since wages stand- in such a close relation to pro- 
ductivity, a diminution of product must finally diminish the 
amount available for the payment of wages. Monopoly of in- 
dustry is at bottom as prejudicial to the wage-earner as to the 
consumer. 

Of more importance in practical life is the divergence of 
actual from normal wages ascribable to inequality in the con- 
ditions of competition. As we learned at the outset of our 
discussion, the ability to drive a bargain varies, and a unitary 
market price can emerge only when there are complete com- 
petition and mobility on the side of both buyer and seller. In 
the labor contract the individual seller of labor is in ordinary 
cases the weaker party. The workman is both more ignorant 
and more necessitous. He is more ignorant because, while 
the employer knows both the cost of labor and the price of the 
product, the workman is unacquainted with the details of 
the business and can only guess at his real contribution to the 



§ 179] Wages and Profits. 427 

product. He is more necessitous because he cannot afford to 
wait. The machine may he idle, and profits may cease for a 
time ; but running expenses also cease, at least in part, and 
when the machine starts up, profits will follow. The laborer 
may remain idle, but running expenses, that is, cost of living, 
do not cease. If the machine stops, it still endures ; if the 
workman stops, he starves. 

When therefore the individual laborer is left to his own de- 
vices, he may fail to secure his due share of the joint product. 
Advantage may be taken of his ignorance or of his necessity ; 
and the example that is set by the less scrupulous employer is 
not only contagious, but also often imposes itself as a competi- 
tive condition upon others who might naturally possess more 
scruples. The result is a struggle between wages and profits 
which transfers itself to the arena of both economic and politi- 
cal life, and which creates what is known as the labor problem. 

179. Wages and Profits. 

The relation of wages to profits is thus complementary as 
well as antagonistic. They are complementary in the sense that 
prosperity may mean both high profits and high wages. Profits, 
as we have seen, are the chief inducement to enterprise. The 
anticipated gains to be derived from fluctuations in value 
constitute the real incentive to business activity and hence to 
modern production. The hope of profits leads to the invest- 
ment and increase of capital, and to a better co-ordination of 
the factors of production, and thus under normal conditions to 
an increase of output. The increase of product is apt indeed 
to be followed by a growth of population. When the product 
increases at a faster rate than the available supply of workmen, 
that is, as long as the product keeps ahead of the population, 
wage will tend to rise. Profits are constantly exhausting 
themselves, only to be renewed in a fresh attempt to conquer 
nature. High profits are hence the best hope of high wages, 
because it is chiefly through the existence of high profits that 
mankind has any assurance of that augmented output which 



428 Wages. [§ X79 

is the chief factor in raising the marginal contribution of labor. 
Profits and wages are in this sense complementary. 

On the other hand, the immediate division of the product in 
each individual case and at any given moment is largely one 
of relative power. The more that is taken as profits by any 
single employer or group of employers, the less will be available 
as wages ; the more that is paid as wages, the less will be re- 
ceived as profits. In this sense wages and profits are antago- 
nistic. In good times wages and profits both go up, in bad 
times wages and profits both go down ; but at all times both 
employer and employees will strive to secure the greatest pos- 
sible share of the joint product for themselves. Under condi- 
tions of frictionless competition, complete mobility and effective . 
equality in bargaining, the share of each will adjust itself to the 
point of relative contribution to the product ; under conditions 
of actual life each side may secure an excess at the expense 
of the other, and with incidental injury to the public. In 
the great majority of cases the excess goes to the employer. 
How this excess may be obviated, and this injury reduced to 
the lowest proportions, becomes therefore a matter of urgent 
concern. 

The struggle of the laborer to improve his condition has 
assumed four principal forms. He has sought to invoke the 
protection of the law ; he has endeavored to strengthen him- 
self and his fellows by organization ; he has attempted to sub- 
stitute a new principle of remuneration ; he has striven on the 
basis of existing methods to effect a working agreement with 
the employers. In other words, the four phases of the struggle 
are labor legislation, labor organization, profit sharing or co- 
operation, and arbitration or conciliation. These will now 
engage our attention. 



CHAPTER XXVII. 
THE LABOR PROBLEM. 

180. References. 

In General: Adams and Sumner, Labor Problems (with excellent 
bibliographies, 1905); J. G. Brooks, The Social Unrest (1903); United 
States Industrial Commission, Report (1901), V, XVI, XVII, XIX, 723- 
956; P. de Rousiers, Labour Question in Great Britain ( 1896) ; G. Drage, 
Labour Problem (1896); W. H. Beveridge, Uiiefnployment (1909); Re- 
ports and Bulletins of the National Civic Federation (1901-1910); 
Reeves, State Experiments in Australia and New Zealand (2 vols., 1903). 

Labor Legislation: Mrs. S. Webb (ed.), The Case for the Factory 
Acts (1901) ; S. and B. Webb, Problems of Modern Industry (1898), ch. 
iv; Hutchins and Harrison, A History of Factory Legislation (1903); 
W. S. Jevons, The State in Relation to Labor (18S2); S. Whittlesey, 
Tendencies of Factory Legislation (Am. Acad, of Polit. and Social Science, 
Annals, XX, 1903) ; A. F. Weber, Labor Legislation in the United States, 
in Exhibit of Departtnent of Labor at the Louisiana Purchase Exposition 
(1904); Goldmark and Sikes, Child Labor Legislation (Handbook pub. 
by the National Consumers' League, 1905); H. R. Seager, Attitude of 
American Courts to Restrictive Labor Laws (Pol. Sci. Quart., XIX, 1904). 

Labor Organization : S. and B. Webb, History of Trade Unionism 
(1894) and Industrial Democracy (2d ed., 1904); W. Smart, Distribution 
(1899), chs. xx-xxiii; J. Mitchell, Organized Labor (1903) ; F. S. Hall, 
Sympathetic Strikes and Sympathetic Lockouts {Columbia Studies, X, 1898) ; 
G. G. Groat, Trade Unions and the Law in New York {Ibid., XIX, 
1905); Hollander and Barnett, Studies in American Trade-Unionism 
(1906). 

Profit Sharing and Co-operation: D. F. Schloss, Methods of In- 
dustrial Remuneration (3d ed., 1898) ; N. P. Gilman, Profit Sharing ( 1889) 
and A Dividend to Labor (1899) ; Beatrice Potter [Mrs. Webb], The Co- 
operative Movevient in Great Britain (1895) ! ^- Jones, Co-operative Pro- 
duction (1894); Catherine Webb, Industrial Co-operation (1904) ; J. G, 
Holyoake, History of Co-operation (2 vols , 2d ed., 1906). 

Arbitration and Conciliation : H. Crompton, Industrial Concilia- 
tion (1876); L. L. '?x\cQ, Industrial Peace (1887); G. v. Schulze-Gaver- 
nitz, Social Peace (trans, by Wallas, 1893) ; E. L. Shuey, Factory People 

429 



43° Labor Problem. [§ i8i 

and their Employers (1900) ; N. P. Gilman, Methods of Industrial Peace 
(F904) ; V. S. Clark, The Labor Movement in Australia (igo6) ; H. Broad- 
head, State Regulation of Labour in New Zealand (igo8). 



181. Labor Legislation. 

Legislation in behalf of the laborer has assumed three prin- 
cipal forms, dealing respectively with the conditions of employ- 
ment, the conditions of remuneration and the results of 
employment. 

(i) The chief abuses in the conditions of employment first 
disclosed themselves in the factories. The enactments de- 
signed to deal with these abuses are hence known as factory 
laws. It was not long, however, before the provisions of the 
law were extended to other occupations than those conducted 
in technical factories. None the less, the old name has per- 
sisted. England, as the original home of the factory system, 
led the way. The act of 1802 applied only to very young ap- 
prentices in cotton and woollen mills, that of 18 19 to all young 
children in cotton mills. In 1825 and 1831 the age limit was 
raised ; in 1833 the law was extended to other textile industries ; 
in 1 84 1 and 1844 it was applied to women in mines and tex- 
tile factories. In 1847 and 1850 the provisions were made 
more rigorous ; in 1864 they were made applicable to all large 
industries, and in 1867 to smaller workshops, until in 1878 a 
general code of factory legislation was enacted. In the rest of 
Europe and America the system came somewhat later. In the 
United States the movement began in New England, spread 
subsequently to the Middle and Western states, and is now 
being actively pushed in the South. 

The earliest form of factory legislation was the prohibition of 
child labor. Children of tender age must be protected not 
only against the unprincipled employer but against the greedy 
or necessitous parent. The argument is biological and social 
as well as economic. To permit child labor is to stunt body and 
mind, to breed ignorance and immorality, to foster a progres- 
sive deterioration of the working population. The claim that 



§ i8i] Labor Legislation. 431 

the earnings of the children are needed for the family support 
is dispelled by the well-authenticated fact that when the father 
is the sole wage-earner his income tends to equal the previous 
earnings of the entire family. In advanced states like New 
York child labor is regulated by the compulsory school law 
which prohibits employment of children under 14 during the 
school term ; by the factory law which forbids child work under 
14 years, and regulates it between the ages of 14 and 16 ; by 
the mercantile law which extends substantially the same pro- 
visions to all commercial employments; and by the street 
trades law which applies to youthful newspaper vendors. The 
National Child Labor Committee formed in 1904 is bending 
its energies to securing the better enforcement of the law in the 
East and the enactment of similar measures in the rest of the 
country. 

The second form of factory legislation is the regulation of the 
hours of labor. Applied first to children, it was gradually ex- 
tended to all minors, then to women, and finally to adult males. 
At every stage in the development it was opposed as an in- 
fringement of " freedom of contract." In the United States 
at present there is still the greatest diversity in the laws and 
their interpretation; but since the decision in 1898 by the 
Supreme Court upholding the Utah law which estabhshed the 
eight-hour day in mines and smelters, and the Kansas law, 
there has been a noticeable tendency in the direction of sus- 
taining the constitutionality of similar measures.^ 

The third form of factory legislation is the protection of life, 
limb and health. After the early appalling experience of the 
ease with which operatives were maimed and killed, government 
intervened to require various elaborate precautions and safety 
appliances. These provisions are now common, although not 
uniformly enforced. From protection of life to that of health 

1 This tendency has suffered what is probably only a temporary set- 
back through the decision of the Supreme Court in 1905 asserting by a 
bare majority the unconstitutionality of the New York ten-hour bake- 
shop law. 



432 Labor Problem. [§ i8i 

is only a step, and in the so-called " dangerous trades " sanitary 
restrictions are now by no means unusual. The most recent 
development in America is the application of the principle 
to sweat-shops or the so-called parasitic trades, where as in 
Massachusetts and New York a license is now required for the 
manufacture of clothing, artificial flowers, and cigars in the 
home. It is an attempt to make domestic workshops amen- 
able to factory restrictions. 

(2) When we consider the conditions of remuneration rather 
than of employment, we encounter two chief forms of legisla- 
tion. The one deals with securing the payment of wages. 
The principal abuses here are deferred payment of wages and 
payment in "truck" or orders on the company stores, often 
known as the " pluck me " stores. The truck system has been 
in great measure abolished in Europe by legislation requiring 
the payment of wages in cash. In the United States it has 
been restricted so far as corporations are concerned, but the 
effort to apply the prohibition to private employers is still in 
great part rendered nugatory by the courts as a violation of 
" freedom of contract." 

While America lags behind Europe in this respect, both con- 
tinents still shrink from adopting the second form of wage 
legislation, recently enacted in Australasia, namely, the mini- 
mum wage laws. Beginning in Victoria in 1896 with certain 
" sweated " industries, the plan has now extended to most of the 
colonies and has been made applicable to many trades. In 
those occupations where the remuneration is deemed to be be- 
low the level of a " living wage," a fixed minimum is established 
either by official bodies or by joint boards composed of the 
employers and employees in each trade. These rates are then 
compulsory upon the whole trade. The nearest approach to 
the system in Europe and America is the legislation fixing the 
wages of public employees like street-cleaners at a definite sum 
and requiring the payment of the " prevalent rate of wages " in 
all work done by the contractors for the government. Although 
the Australasian system has on the whole worked satisfactorily, 



§ i8i] Labor Legislation. 433 

there is an obvious risk in such radical legislation in complicated 
communities whose industry is exposed to the constant changes 
of interstate and foreign competition. Yet it may well be that 
similar methods will ultimately be found necessary here. 

(3) We come, finally, to the legislation affecting the results of 
employment. This, again, assumes two chief forms. The most 
important is that of employers' liability for injuries sustained 
by the workmen. In the United States this has been limited 
by the legal rules of implied risk and common employment or 
fellow servant. The first of these is to the effect that a work- 
man on entering an occupation voluntarily assumes the risks 
connected therewith. The second is that when the injury has 
been caused by an agent, tjie latter must be regarded as a co- 
servant, and the principal is therefore not responsible. Under 
this system the employer virtually escapes all liability. 

In Europe both these principles have been discarded. The 
doctrine of implied risk has been replaced by that of profes- 
sional or occupational risk. It is recognized that, apart from 
wilful or contributory negligence, the individual workman can- 
not be held responsible. In entering the occupation he has no 
choice. The risk is not a personal but a collective one ; it be- 
longs to the occupation, and should be a cost of the business 
in the same sense as insurance against other risks is a part of 
cost. Secondly, in modern factories or large enterprises the 
old common law rule of fellow servant, which arose in the day 
of the guild and domestic systems, has lost all meaning. To 
call a railway superintendent and a brakeman fellow servants 
because they both receive a salary is absurd. The old rule is 
gradually being modified by statute, but no American state has 
yet successfully applied to all industries in general the principle 
of Workmen's Compensation Acts, which, like the English law 
of 1897, frankly throws the responsibility for accidents upon the 
employer. The only attempt, that of Maryland in 1902, has 
recently (1905) been declared unconstitutional for a minor 
defect. 

Other countries of Europe as well as Australia have gone con- 

28 



434 Labor Problem. [§ 182 

siderably further, and have adopted the plan of compulsory in- 
surance of the laborer. Beginning in Germany in the eighties, 
the system has spread rapidly. It consists of three features — 
insurance against accidents, illness and old age — the premiums 
being paid in a declining ratio by the employer, the govern- 
ment and the workman respectively. America is manifestly 
not, yet ripe for these methods, but with the gradual emergence 
of the- sense of social solidarity, the economic legitimacy of 
such a system may finally be acknowledged. It is an attempt 
to make the community as a whole bear what are really the 
social burdens of modern industry, with its fluctuations, its 
risks and its uncertainties. 

182. Labor Organizations — Object and Function. 

Side by side with the effort of the state to help the laborers 
to secure a reasonable equality has been the endeavor of the 
workmen to help themselves through associated action. In 
fact the former has been largely the result of the latter. The 
organizations, starting within each trade, became known as 
trade-unions and gradually assumed a national, and in some 
cases even an international, form. Where action involving the 
general interests of all unions becomes desirable, we find them, 
as in the United States, combining to form councils or central 
labor unions in the cities, state federations in the common^ 
wealths, and finally national bodies like the American Federa- 
tion of Labor. 

- The justification of trade-unions was long disputed. Under 
the early law they were illegal as conspiracies. It was not 
vmtil 1824 that they were legitimized in England, and not 
until much later that the free right of association was conceded 
elsewhere. The recognition that is to-day almost universally 
accorded them rests on the economic principle that in the 
modern labor contract the conditions of work have become 
collective or group conditions, and that the bargaining to be 
equal must be collective or group bargaining. The individual 
workman is nowadays helpless against the typical employer. 



§ 182] Labor Organizations. 435 

In a railway or a large factory work is carried on under broad 
general rules. The laborer who forms one of a group of tens, 
of hundreds or of thousands of workmen cannot expect to 
bargain successfully as an individual. His only hope lies in 
association. Freedom of contract is illusory because of the self- 
evident inequality. The trade-union is an attempt to restore 
to the individual as a member of the group the equality which 
has been lost through the transition from small-scale to large- 
scale industry. The trade-union is as inevitable a product of 
modern economic life as the corporation. The one is an 
association of labor, the other an association of capital ; both 
are attempts to attain individual prosperity through concerted 
efforts. 

There are two aspects to every trade-union, — the militant 
and the fraternal.. As a fraternal organization the union seeks 
to accomplish some of the ends of the old-time guild. It 
insures the members against accident or death, it supports 
them when ill or out of work, it helps to educate them by 
meetings and lectures. More important, however, are the 
militant functions, through which the union seeks to promote 
its industrial power and to increase the earnings of its mem- 
bers. From this point of view its activities may be reduced 
to two general categories, — the attempt to standardize con- 
ditions of employment and the endeavor to restrict work. 

Under the first head must be put the effort to secure a 
standard rate of pay and a normal working day. Sad experi- 
ence has taught the laborer that if the average employer is 
free to make individual bargains with each workman he will 
tend to select the exceptional man to set the pace, and by 
paying him only ordinary wages, scale down the remuneration 
or overtax the energies of the average man, thus leading to 
premature decay and a real exploitation. To prevent this 
progressive deterioration the unions seek to secure a standard 
rate of wages. It is sometimes objected that this implies 
uniformity of payment. This is not quite accurate. Wages 
are paid either by the piece or by time. In the case of 



43^ 



Labor Problem. [§ 182 



piece work the more skilful workman will manifestly earn 
more. In certain trades piece work is preferred because, 
when new machinery is constantly being introduced or old 
machinery speeded up, it enables the workman to share in the 
advantage of the increased output. In England the unions 
advocate piece work in many trades ; in America the prefer- 
ence is less marked, but is found in occupations like those of 
the shoe-workers, the weavers and some others. Even in the 
case of time work, however, which is advocated by the great 
mass of American unions, the uniformity that is sought is that 
of equal pay for equal work. There is little objection to 
putting the more skilful men into classes higher than the 
standard ; but the standard itself must not be lowered. The 
effort is to make the standard a minimum, not a maximum. 

Even when the uniformity of pay seems to be that of a so- 
called dead level, it must not be forgotten that the unions are 
here following the tendency of all modern life. The essence 
of modern capitalism is, as we have seen, the standardization 
of industry. If business enterprise depends on mass output 
and uniform production in order to improve the type, the 
laborer must not be blamed for pursuing the same end. At 
bottom the method is that of all democracy. Democracy is 
the most difficult form of government because its success 
depends on the high level of the mass. The path of progress 
consists in pulling the mass up to the plane of the better man, 
not in developing the aristocrat at the expense of the mass. 
Trade-unionism, like democracy, seeks here to level up, not to 
level down. 

The fixing of a normal working day seems to be in contrast 
to the standard rate of pay, because the former prescribes a 
maximum, the latter a minimum. In reality, however, there 
is no difference. In a factory all must begin and stop work 
at the same time, because all are dependent on the machine. 
If overtime is permitted, it will not be long before the employ- 
ment will be limited to those that are willing to work overtime ; 
and when that occurs, the pay per hour will inevitably be 



§ 182] Labor Organizations. 437 

reduced. The attempt to curtail the hours of work is really an 
attempt to raise the standard of pay. Experience has shown 
that with the introduction of machinery concerted action of 
the men will be able to extort higher pay with shorter hours. 
According to the varying conditions in different industries, the 
normal working day is now in large parts of the United States 
as low as ten, nine and even eight hours. The maximum 
working day as well as the minimum rate of pay is the result 
of an effort to standardize conditions of employment, so that 
the standard may move up instead of down. 

The success of the unions in standardizing employment is 
always beneficial to the workmen. Where the conditions are 
such that there is a real economy in high wages, it may go hand 
in hand with the ultimate interests of the employer and the 
public as well. When, however, we come to the other phase 
of trade-union activity — the attempt to restrict work — the 
matter is somewhat more complicated. 

This effort assumes three forms, — the claim of the right to 
a trade, the limitation of apprenticeship, the restriction of out- 
put. In the first place, not a few of the labor troubles of the 
present have their origin in trivial and unseemly quarrels be- 
tween the unions themselves as to who should do the work. 
These jurisdictional disputes are either (a) territorial disputes, 
due to the entrance of a new union into a given territory ; (^) 
demarcation disputes, where each union claims that a particular 
kind of work on the fringe belongs to it ; (^) organization dis- 
putes, where the increasing specialization of industry calls into 
being a new union which separates itself from the old, and (d) 
trade autonomy disputes, due to the fact that some organizations 
are industrial unions, comprising all the workmen in a given in- 
dustry, while others are trade-unions including only the work- 
men in particular sections or trades within a great industry. 
All these jurisdictional disputes represent an attempt to transfer 
the old doctrine of vested interests from the domain of capital 
to that of labor. Secondly, the unions often insist on an unduly 
long period of apprenticeship, and seek to limit the number of 



438 



Labor Problem. [§ 182 



apprentices, ;ox to admit new-comers to membership only on 
the payment of high fees. Thirdly, they frequently object to 
the introduction of new machinery or new methods, and when 
this objection is overruled they seek to limit the amount of 
work to be done through the '•' go easy " or " ca-canny " system. 

That all these methods are in one sense indefensible is clear. 
If wages ultimately depend upon product, any effort to restrict 
product must finally act as a boomerang. Many unionists 
believe that there is a fixed amount of labor which has to be 
done ; that if their union does not secure it, another will ; and 
that if there are fewer members of the union, or if they all work 
less, or if there are less machines, the pay of each man will be 
higher. This " lump-of- labor " doctrine of the workman is 
just as fallacious as the old " wages-fund " theory of the capi- 
talist and leads to equally erroneous conclusions. 

From another point of view, however, these practices do not 
appear so utterly reprehensible. The jurisdictional disputes of 
the unions are sometimes the result of an effort to prevent the 
standard rate in the trade from being whittled down through 
the abandonment of a substantial part of the work to those 
accustomed to a lower remuneration. The effort to restrict 
apprentices is occasionally due to the endeavor to insure ade- 
quate preparation for the trade, or to frustrate the scaling down 
of all wages to the level of the apprentices. The attempt to 
fix a maximum output may be due to the same reason which 
led to the maximum working-day, — the desire to prevent the 
"bell-wether," or "pace-maker," or "rusher," or "leader" 
from subtly reducing the standard of the average workman. In 
short, while restriction of work is in itself indefensible and un- 
economic, it may in certain cases turn out to be a form of 
standardization and thus not without justification. Whether it 
is the one or the other can be determined only after a careful 
scrutiny of each individual case. The most progressive unions 
are now uncompromising foes of restriction, welcoming the in- 
troduction of new and better methods and discouraging careless 
and inefficient work. . . 



§ 183] Labor Organizations. 439 

183. Labor Organization — Methods. 

Such being the objects of labor organization, a word must 
be added as to the means utiUzed to secure these ends. As 
miUtant organizations the unions employ two chief methods, 
— the strike and the boycott. The strike or concerted stop- 
page of work depends for its success upon the ability of the 
strikers to prevent others from taking their place. This has 
brought them into conflict with the law. The right to strike 
has been only grudgingly conceded. At first the courts held 
all strikes illegal as conspiracies, then they assumed the exist- 
.ence of malicious intent, next they endeavored to distinguish 
between various kinds of motives, especially in the case of 
" sympathetic " strikes, and finally they are now tending to dis- 
card altogether the question of motive and to uphold the right 
to strike as such. This, however, carries with it the right of 
picketing. When picketing assumes the form of peaceable per- 
suasion to induce others to refrain from working, it is justifiable ; 
when it degenerates into forcible opposition, disorder and 
wanton injury to body or property, it is clearly indefensible 
and is to be sternly repressed. 

The history of strikes during the past half-century has 
accentuated four facts, (i) The losses to the strikers have 
been much exaggerated. The permanent gain from a success- 
ful strike often outweighs the temporary loss of all strikes, 
including the failures. The real injury is the disarrangement 
of industry and its effect on the consumer. (2) With the 
growth of unionism there has been a distinct amelioration 
in the conduct of strikes. Violence and bloodshed are now 
less common than formerly. (3) The oldest unions ap- 
. prove of strikes only as a last resort ; but when once entered 
upon, the strike is deemed, to be distinctly more advantageous 
to the laborers than was the case in former decades. Strikes 
authorized by the central bodies are now both more infrequent 
and more successful than unauthorized strikes. Unionism has 
been, on the whole, a conservative force. (4) The outcome 



44° Labor Problem. [§ 183 

of a strike is largely dependent on the state of public opinion, 
and the strike itself is no longer held to be a matter of private 
concern as between the employer and the workmen. The 
coal strike of 1902 was won, and the New York Subway strike 
of 1905 was lost, almost entirely because the issues were so 
clear that the general sentiment favored the strikers in the one 
case and opposed them in the other. The table opposite 
page 440 shows some results of strikes in the United States 
from 1880 to 1900. 

The second practice of modern unionism is the boycott, or 
attempt on the part of the workmen to induce third parties to 
abandon business dealings with the employer. In its negative 
aspect it takes the form of the union label, which guarantees 
to the public that the goods have been produced under con- 
ditions approved by the union, or of the white list which 
contains the names of those firms especially recommended, 
because they adhere to union conditions. In its positive 
aspect it assumes the form of the blackhst and the boycott 
proper. The name blacklist, however, is generally applied to 
the action of the employer in denouncing some obnoxious 
workman ; while the analogous method on the part of the work- 
man is termed the unfair list. The unfair list is usually confined 
to the mere publication of the names of undesirable firms : 
the boycott proper consists of more radical and thorough- 
going attempts to prevent business dealings. The negative 
boycott is usually upheld ; the positive boycott is declared 
illegal, although there is a tendency in the modern law, even 
if as yet not so pronounced as in the case of strikes, to take a 
more liberal view and to make the decision hinge on the 
question of social progress. 

The most recent activity of American unionism culminates 
in the question of the open shop. Originally a closed shop 
meant one objected to by the union because of a boycott or 
strike. When the boycott or strike was called off, the shop 
was declared open. Now, however, the closed shop means 
the union shop, that is, the shop which is closed to non-union 



RESULTS OF STRIKES ORDERED BY LABOR 
ORGANIZATIONS, AND NOT SO ORDERED, 1881 TO 1900. 

BY YEARS. 



YEARS 




1881 
1882 
1883 
1884 
1885 
1886 
1887 
1888 



1891 
1892 
1898 
1894 
1895 
1896 
1897 
1898 
1899 
1900 



j ORDERED 

I NOT ORDERED 

j ORDERED 

( NOT ORDERED 

j ORDERED 

I NOT ORDERED 

j ORDERED 

( NOT ORDERED 

j ORDERED 

i NOTORDERED 

j ORDERED 

1 NOTORDERED 

j ORDERED 

\ NOT ORDERED 

I ORDERED 

j NOT ORDERED 

J ORDERED 

I NOT ORDERED 

( ORDERED 
\ NOT ORDERED 
j ORDERED 
( NOTORDERED 
j ORDERED 
( NOT ORDERED 
j ORDERED 
( NOTORDERED 
( ORDERED 
( NOT ORDERED 
j ORDERED 
( NOT ORDERED 
j ORDERED 
I NOT ORDERED 
( ORDERED 
\ NOT ORDERED 
j ORDERED 
I NOTORDERED 
( ORDERED 
I NOT ORDERED 

( ORDERED 

I NOT ORDERED 



From 



■ succeeded, □succeeded PARTLY, 
Bulletin of U.S. Bureau of Labor, No. 54 0904;. 



□failed. 



§ 183] Methods. 441 

men ; the open shop is open in the sense that the employer 
may engage non-unionists. There is, however, still much 
confusion because of the failure to distinguish between a 
closed shop and a closed union. An open union is one which 
will admit any competent man into its ranks ; a closed union 
is an indefensible monopoly. No one can uphold a closed 
shop with a closed union ; the real controversy turns on the 
question of the closed shop with an open union. That is the 
true problem of the union shop. 

In most of the English and in many of the American unions 
the open-shop question plays no role at all. This is generally 
true (i) where the agreements are made not with the indi- 
vidual employer, but with an association of employers, whereby 
it becomes the interest of each to prevent any infraction of the 
compact by his competitor; (2) where the agreement is made 
not only for the union men, but for all the workmen, so that 
the employer can secure no advantage by hiring non-union 
men at lower wages ; (3) where all grievances of whatsoever 
nature are left to a board of arbitration. When any of these 
conditions is absent, as in the building trades or the clothing 
industry, it is difficult for an open-shop union to survive, and 
the institution of the closed shop often becomes a sine qua 
non of the existence of the union. It is the same consideration 
which explains the fact that in some cases the non-union man 
is regarded with indifference and that in others he becomes 
a "scab" or "strike breaker" and is considered a traitor or 
renegade. In such cases the appeal of the employer to the 
sacred rights of individual liberty falls on deaf ears, because 
the workman feels that the real liberty of his class is a 
result of associated action and that association here depends 
on the closed shop. Whether it is defensible or not can 
therefore be decided only after a careful consideration of the 
particular conditions. That the unions sometimes go too 
far is indubitable ; that the employers' association recently 
formed with the slogan of "liberty and the open shop" is 
equally extreme is no less indisputable. The real test in both 



442 Labor Problem. [§ 184 

cases is this : is the union standardizing rather than restricting 
work, and is the closed shop necessary to the perpetuation of 
the union? 

184. Profit Sharing and Co-operation. 

While wages constitute the ordinary method of recompense 
to the laborer, there are two other possible systems of industrial 
remuneration. The one known as co-operation rests on the 
elimination of the capitalist as distinct from the laborer; the 
other, which retains the capitalist but involves the participation 
of the laborer in the outcome of the enterprise, is popularly, 
although inaccurately, called profit sharing. 

We say inaccurately, because the method of participation is 
found in three forms, — as a substitute for the wages system, as 
an adjunct to the wages system and as a modification of the 
wages system. The first is technically called product sharing, 
the second is known as gain sharing, while the third is the real 
profit sharing or industrial partnership. 

(i) The principal example of product sharing is seen in 
farming and is known as the metayer method or share system. 
The one party supplies the land and occasionally additional cap- 
ital, the other furnishes the labor ; and the product is divided. 
We call it a substitute for the wages system, because the remu- 
neration of the tenant is not a stipulated wage but is contingent 
on the produce. Outside of agriculture, the chief instance is 
that of the fishing industry. In the Gloucester fisheries, for 
instance, when the capitalist provides the vessel, food and gear- 
ing, the " catch " after deducting the " trip charges " (/. e. the 
cost of the ice, barrels and water) is divided equally between 
the ship-owner and the crew. This is " sharing on halves " or 
the " half lay." When the crew furnishes the gear and provisions 
as well, they get three quarters of the catch, and the system i§ 
called " sharing on the quarter," or the " quarter lay." Some- 
times the " fifth lay " is found. In seine fishing all of the crew 
share equally ; in other cases the share of each is apportioned 
according to his catch. The fishermen prefer this to fixed wages, 



§ 184] Profit Sharing and Co-operation. 443 

because of the intimate relation of reward and effort. When 
the fish are sighted, the most unremitting energy is neces- 
sary, and the men are unwilling to expose their rate of pay to 
the hazard of the lazy or inefficient wage-earner. The capi- 
talist also favors the system, because it augments his profits. 
Another example of product sharing is the system of " tribute " 
still found in the Cornish mines, where each " pitch " is let 
out to that group of miners who agree to work the ground 
for the lowest sums per pound on the agreed values of the ore. 
In all such cases of product sharing the earnings of the laborers 
depend entirely on the results of their own efforts, not on the 
profits of the capitalist. Where the value of the product is 
dependent on the skill of the entrepreneur, as in ordinary in- 
dustry, product sharing is inapplicable. 

(2) The next form of participation recognizes the perma- 
nence of the wage-earner, but awards him an added compen- 
sation as an incentive to better work. This also is really not 
profit sharing, because the extra sum is independent of actual 
profits and must be paid whether profits accrue or not. It is 
called " gain sharing " because both employer and wage-earner 
share in the increased gains that are presumed to ensue. Some- 
times it is called the system of the " progressive wage," or the 
"premium payment," or the "bonus plan," or, as in England, the 
" reference rate " or "good fellowship " system. While a few such 
experiments have met with success, they have not on the whole 
commended themselves to the American workman. For since 
the bonus plan is based upon a minimum wage with a premium 
in certain cases, the average unionist fears that what may be 
gained by some as a bonus will be more than lost by a reduc- 
tion of the minimum. He prefers to raise the standard rate 
for all, rather than to increase the premium for some. 

(3) The final plan of participation leaves untouched the 
rate of wages, but modifies the labor contract by granting to the 
workman some participation in the actual profits of the business. 
The laborer here receives not only wages but profits, and the 
system is hence properly called profit sharing. The division can 



444 Labor Problem. [§ 184 

be accomplished either by an annual cash dividend, or by a de- 
ferred participation in some provident fund or annuity, or by 
the distribution of shares in the stock of the corporation. The 
objects of such a system are in the highest degree commend- 
able, both as leading to increased efficiency and as conducing 
to industrial peace. But here again experience, especially in 
America, has shown that the system possesses only a limited 
efficacy. The difficulties are fourfold : (a) it requires a pecul- 
iarly broad-minded employer; (d) it presupposes a set of 
workmen who are at once so shiftless that they are not doing 
their whole duty and so intelligent that they realize the ad- 
vantages of the inducement to more strenuous work ; (^) it 
assumes the existence of profits, whereas the majority of busi- 
ness enterprises incur losses ; (d) it complicates the wage con- 
tract by introducing another possible element of dispute in the 
ascertainment and adjustment of profits. 

While all these forms of participation rest on the continued 
existence of the capitalist, the system of industrial co-operation 
attempts to eliminate the capitalist by uniting in the same in- 
dividual the functions of laborer, capitalist and entrepreneur. 
In communities like England, where large department stores 
are unknown, distributive co-operation or so-called co-opera- 
tive stores may be of some advantage to the consumer. In 
countries like Germany or Italy, where credit facilities are back- 
ward and where there is a leisure class ready to devote itself 
to the public good, co-operative banks, especially in agricul- 
tural districts, may achieve some measure of success. In 
special cases a system of co-operative credit, like the Building 
and Loan Associations of the United States, may subserve a 
useful purpose. But as an attempt to replace the wages sys- 
tem or as a general scheme of social regeneration, productive 
co-operation has been attended with insignificant results else- 
where and with almost complete failure in the United States. 
The reasons that usually militate against success are fivefold : 
(i) the lack of adequate initial capital; (2) the scarcity of 
organizing ability ; (3) the unreadiness of the average member 



§ 185] Arbitration and Conciliation. 445 

to pay a salary sufficient to retain the exceptional manager ; 
(4) the mutual distrust and the absence of the true co-opera- 
tive spirit; (5) the danger, in case of success, of conversion 
into the customary profit-making corporation. With human 
nature as it still is found in the ordinary man, co-operation is 
even less than profit sharing a social panacea or an immedi- 
ately practicable means of escape from modern industrial evils. 

185. Arbitration and Conciliation. 

The economist who is to be of any service to the statesman 
must therefore recognize human nature as he finds it. The 
avenue to industrial peace must be sought on the basis of 
existing industrial methods. While the enthusiastic idealists 
have been pursuing the will-of-the-wisp of socialism and 
co-operation, the long-headed practical men have elaborated 
working schemes of slow and steady progress. These rest on 
the frank recognition by both parties of the utility of collective 
or group bargaining. 

Labor disputes may be adjusted before or after the differ- 
ences have reached a climax. If a strike or lockout has been 
declared, it is difficult to allay the feelings of excitement or 
resentment. In industry as in politics it is harder to restore 
peace than to preserve it. This is, however, a lesson that is 
learned with difficulty. In early communities peace {pax) 
is the short-lived compact to cease from normal hostility ; in 
civilized nations the normal state of peace rests on mutual 
regard and readiness to make mutual concessions. The going 
about with a chip on the shoulder or the conviction that the 
" divine right " is all on one side is as disastrous in industry as 
in politics. 

In the early stages of the factory system the employer 
refused to recognize any but the individual workman ; in the 
next stage he was willing to deal with representatives of his 
own working force ; at present he often concedes the wisdom 
of transacting business with the union as a whole. At first the 
workman granted the employer short shrift and strikes were 



446 Labor Problem. [§ 185 

bitter and violent ; as the unions became more powerful they 
were sobered by responsibility ; and now in many cases their 
chief function consists in averting strikes and adjusting dis- 
putes. In industry as in politics war is still a last resort, but 
in those occupations where strikes have become the exception 
rather than the rule, the result is due chiefly to the elaboration 
of the so-called trade agreement. The system of conciliation 
is one of joint conference ; and it succeeds best where not 
only the employees but the employers are organized. The 
employers' associations, like the trade-unions, are, especially in 
their early years, often intolerant, vindictive and short-sighted. 
But experience happily shows that the mere habit of confer- 
ence between representatives of both parties tends to dispel 
distrust, to allay animosity and to engender those feelings of 
mutual respect which are the surest guarantee of peace. In 
the United States, which began to tread the path of trade 
agreements at a somewhat later date than England, the inde- 
pendent movement within the industries themselves has been 
powerfully strengthened by the National Civic Federation. 

If the dispute has come to a head, the attempt at adjudi- 
cation is commonly called arbitration. The usage, however, is 
not uniform, for in many cases the arbiter or the board of arbi- 
tration succeeds in compounding the difficulties before they 
reach an acute stage. In the absence of an effective machinery 
within the trade, government often steps in. When it simply 
tenders its good offices through a system of voluntary arbitra- 
tion, as in many of the American states, its success is not 
conspicuous. When it endeavors to force the contestants to 
come to terms, as in the Australian systems of compulsory 
arbitration, the danger is that an authoritative arbitrament 
may rob the one or the other party of the freedom to develop 
a cherished ideal that may be necessary to its own successful 
growth. Yet here again the interests of the part must be 
subordinated to those of the whole, and the final test must be 
the welfare of the community. Where labor disputes and 
strikes result in a wanton and widespread social injury, ag 



§ 185] Arbitration and Conciliation. 447 

in the Chicago strike of 1894, the coal strike of 1902, the 
Colorado strike of 1904 or the numerous "tie-ups" which 
cripple transportation and disrupt industry on a large scale, 
the public will sooner or later insist on some form of settle- 
ment. Voluntary conciliation through trade agreement is 
the method best suited to the temper and tradition of the 
American people, and is fortunately making rapid progress. 
But no amount of reliance on the " sacred right of free con- 
tract " will in the long run prevent society from asserting its 
paramount claims to the maintenance of industrial peace. 
No community will permanently brook opposition to these 
plain dictates of self-preservation and social progress. 



Book IV. 

Value and Exchange. 



CHAPTER XXVIII. 
MONEY, NATURE AND VALUE, 

186. References. 

W. S. Jevons, Money (1879), chs. i-xvi, xxv-xxvi, and Investigations in 
Currency and Finance {1884) ; J. F. Johnson, Money and Currency (n. d., 
1905), chs. i-viii ; J. S. Mill, Principles, bk. iii, chs. vii-x ; M. Pantaleoni, 
Pure Econofnics (1898), part 3,''ch. ii; N. G. Pierson, Principles (1902), 
part I, ch. vii, §§ 6-8; C. M. Walsh, Measurement of Exchange Value 
(1901), chs. iii, vi-xii ; E. W. Kemmerer, Money and Credit Instruments 
in their Relation to General Prices (1907); F. A. Walker, Money (1878), 
part I, chs. iv and viii ; D. Kinley, Money (1904), chs. v-xv ; W. Ridge- 
way, The Origin of Metallic Currency (1892) ; L. L. Price, Money and its 
Relation to Prices (1896) ; J. L. Laughlin, The Principles of Money (1903) ; 
severely criticized by J. F. Johnson, A New Theory of Prices (Pol. Sci. 
Quart., XVIII, 1903), and A. C. Whitaker, The Ricardian Theory of Gold 
Movetnents and Professor Laughlin' s Views on Money (Quart. Jour. Econ., 
XVIII, 1904) ; C. A. Conant, The Principles of Money and Banking 
( T905), vol. i ; C. Rozenraad, The International Money Market (]o\ir. Stat. 
Soc.j LXIII, 1900); B. W. Holt (ed.). The Gold Supply and Prosperity 
(1907); L. da Launay, The World's Gold (1908); W. C. Mitchell, Gold, 
Prices and Wages under the Greenback Standard (1908). 

Index Numbers. The London Economist, March, 1864, with Annual 
Supplements ; R. H. Inglis-Palgrave, Memorandum, to the Commission on 
the Depression of Trade (1886); A. Sauerbeck, in Journal Statistical 
Society (XLIX, 1896, LVI, 1893, ^"*^ following years) ; A. Soetbeer, 
Materialien, etc., translated in Bimetallism in Europe (U. S. Exec. Doc. 
50 Cong., I Sess., No. 34, 1887) and continued to date in Jahrhiicher fiir 
Nat. Oeko7tomie (1892) ; R. P. Falkner, in United States Senate (Aldrich) 
Report on Wholesale Prices, I (1893), continued to 1899 in Bulletin of the 

448 



§ 187] Functions of Money. 449 

Department of Laf>or, No. 27 (igoo); J. R. Commons in Quarterly 

Bulletin of the Bureau of Economic Research, Nos. i and 2 (1900, all 

^ published, with many tables, charts, etc.) ; Dun's Rez'iew, Jan. 12, 1901, 

^ and monthly thereafter ; Bulletin of the Department [now Bureau^ of 

Labor, No. 39 (1902), No. 45 (1903), and in two separate Bulletins (for 

wholesale and for retail prices) annually thereafter to the present time ; 

]'■. V. Edgeworth, Memoranda on the Best Methods of Ascertaitiins; and 

Afcasuring Variations in the Value of the Monetary Standard (British 

vJ( As.sociation Report 1887-1S89) ; W. ^.]Q\ons, Investigations iji Currency 

v^ and Fiiiance (1884), ch. iii ; A. 1.. Bowley, Statistics (1907), ch. ix ; C. M. 

, , Walsh, The Fundamental Problem in Monetary Science (1903). 

187. Origin and Functions of Money. 

The fundamental uses of money are to serve as a medium of 
exchange and to act as a measure of value. Which of these 
was the earlier is uncertain as well as unimportant. As soon 
as the difficulties of an extensive barter disclosed themselves, 
the employment of a commodity for the one purpose implied 
its use for the other. Value in business life is exchange value ; 
when we express exchange values of all other commodities in 
terms of one, we do so with the implication that they are con- 
tinually being exchanged for it, and when they are so ex- 
changed, their relative value is necessarily measured by it. 
Sometimes money is called the standard or denominator of 
value rather than the measure of value. This is, however, no 
real distinction, because a standard is of use primarily for 
measuring. In saying that money expresses the value of com- 
modities in general, or that these values are reduced to a 
common denominator, we virtually affirm that money measures 
their value. Moreover, since the value of anything expressed 
in terms of money is called its price (§ 76), money is some- 
times spoken of as the standard of price. All these terms are 
really interchangeable, and at bottom resolvable into the con- 
ception of money as the medium of exchange. 

The fundamental utility of money, therefore, is its accepta- 
bility or exchangeability. Every commodity indeed will be 
accepted by those who want it, but not by those who have no 

?9 



45 o Money, Nature and Value. [§ 187 

present use for it, and who are uncertain as to their ability to 
dispose of it on advantageous terms. All, however, are willing 
to take money, because they know that there is no doubt of 
their being able to pass it on. Ordinary commodities have a 
more or less limited acceptability; money is the one thing 
that possesses general acceptability. 

The secondary functions of money are three in number : 
(i) Money is a standard of deferred payments. When we 
speak of money as a measure of value we refer to values of 
commodities at a given moment. If, however, we lend some- 
thing for a term of years, it is important that what is repaid by 
the borrower should leave us as far as possible in the same rela- 
tive position as before. Any durable commodity would per- 
form this function, but in the case of money we have greater 
assurance that its value will be at least relatively stable. 
(2) Money is a store of value. If we wish to lay by a fund of 
wealth, it is important that when we want it again we shall be 
able to find it intact. In former times the hoards or treasures 
amassed by individuals and governments played a large role. 
Nowadays, however, this function of money is quite subsidiary : 
instead of putting the coin into our stockings, we place it in 
the bank ; instead of hanging our gold and silver about our 
wives or children, we invest it and receive interest. No one 
to-day keeps more money by him than he actually needs, or 
thinks he will need. As a consequence, unless there is some 
serious defect in the currency situation, there is no such thing 
as idle money, or the hoarding of coin. (3) Money is used 
nowadays as a reserve for credit operations. Considerable 
sums must be kept seemingly idle when they really serve a 
most important function as a basis for credit transactions. 
The table on the next page shows what a large proportion of 
the coin in various countries is kept in reserve by the banks 
or the government. 

The origin of money is to be sought in the attempt to evade 
the difficulties of barter. As soon as the objects to be ex- 



§ i87j 



Functions of Money. 



451 



changed began to multiply, the need of some one commodity 
in which to measure, and through which to exchange, the 
others became obvious. Originally, therefore, all money was 
merchandise, and it was only at a much later period that the 
commodity was stamped or coined. 

Historically almost every imaginable commodity has been 
used for money. Whatever happened to be common and at 



APPROXIMATE STOCKS OF COIN IN VARIOUS 
COUNTRIES IN DECEMBER, 1907.1 





Gold. 


Silver. 


Reserve in Banks 
and Treasury. 


Total. 


United States . . 
Great Britain . . 

France 

Germany . . . 

Italy 

Russia 

Austria-Hungary. 

Spain 

India 

Japan 

China 

Argentine . . . 


$1,154,700,000 

162,000,000 

520,900,000 

147,000,000 

258,200,000 

597,400,000 

226,200,000 

87,800,000 

13,200,000 

83,800,000 

(a) 
127,100,000 


$1,612,700,000 

564,500,000 

926,400,000 

1,044,400,000 

258,200,000 

917,300,000 

303,100,000 

87,800,000 

113,200,000 

95,800,000 

(a) 

(a) 


$715,000,000 

116,800,000 

411,100,000 

223,500,000 

41,600,000 

78,100,000 

104,200,000 

173,700,000 

830,000,000 

54,400,000 

239,600,000 

(a) 



(a) No information available. 

the same time widely wanted, served as money. Articles of 
food like rice, dried fish, olive oil, nuts, wheat, maize, tea, salt, 
dates, tobacco, and whiskey ; weapons like knives, fire-arms, 
sword-hilts, powder and shot ; implements like hoes, shovels, 
and common utensils ; clothing made of wool, cotton, leather, 
skins, pelts, and furs ; animals such as sheep, horses, and oxen ; 
ornaments like beads, shells, ivory tusks, fish teeth, and 
feathers ; and metals like iron, lead, tin, copper, and bronze 

1 Arranged from report of Secretary of Treasury, 1908, p. 342. 



452 Money, Nature and Value. [§ i88 

have been employed at one time or another. Beginning in 
Lydia and JEgina in classic antiquity, silver and gold were 
finally selected in every developed community to receive the 
government stamp as minted or coined money, because they 
possess in a peculiar degree the attributes of transportability, 
divisibility, homogeneity, great value in small bulk, durability, 
recognizability, stability, and adaptability to coinage through 
fusibility, ductility, and malleability. 

188. Kinds of Money. 

Money may be classified in three ways, — as actual and 
ideal money, as metallic and paper money, as standard and 
token money. 

(i) Actual money is that which actually circulates. Ideal 
money or money of account is that in which accounts are 
kept. Its use may be due to necessity or to habit. In the 
middle ages, when actual money was continually tampered 
with, the continental merchants were compelled to keep ac- 
counts in scudi, which were not coined. Guineas are to-day 
unknown in England and shillings in America ; yet sales are 
often effected in Great Britain in guineas instead of pounds, 
and in the rural districts of the Atlantic seaboard transactions 
frequently take place in shillings in lieu of dollars. 

(2) Paper money as opposed to metallic money may be 
subdivided into three classes, — representative, fiat, and fiduci- 
ary money. Representative money consists of paper which 
certifies that an equivalent amount of coin or bullion is depos- 
ited in the government treasury, like the American gold and 
silver certificates. Fiat money consists of paper whose value 
rests on the fiat or declaration of the government, like the 
American greenbacks. Fiduciary or credit money consists of 
promises issued by private or semi-private institutions to pay 
coin, like the national bank notes. The discussion of paper 
money will be deferred to the next chapter. 



§ i88] Kinds of Money. 453 

(3) Standard money is money which is legal tender for all 
debts and used as the standard to which the value of all other 
money is referable. In the case of a forced currency, standard 
money may be composed of paper, but it ordinarily takes the 
form of coin. Standard money is then full-weight coin, the 
value of which is virtually equal to that of the bullion contained 
in the coin. Token or subsidiary money, on the other hand, 
consists of coin whose legal or mint value exceeds that of the 
bullion, and whose coinage is not free, in the sense that no 
private individual is at liberty to demand that the government 
exchange his bullion for coins. Generally, but not necessarily 
as we shall see later, token or subsidiary money is also not legal 
tender. 

In the United States the standard is the gold dollar. The 
law of 1792 provided for the coinage of gold eagles of the de- 
nomination of ten dollars (as well as half and quarter eagles), 
containing 270 grains standard and 247^ grains pure gold, i.e. 
W or 9i6§- thousandths fine, with an alloy of silver and copper. 
In 1834, for reasons to be explained later, the weight was re- 
duced to 258 grains standard and 232 grains pure gold, i.e. 
899.225 thousandths fine. In 1837 the fineness was changed 
to Y^o and, as the weight remained unaltered at 258 grains, the 
fine gold content now became 232.2 grains, at which figure it 
stands at present. In 1849 a double eagle (j^2o), and in 1853 
a three-dollar piece, were added. In 1873 ^he gold dollar of 
25.8 grains standard and 23.22 fine was made the money unit, 
and the alloy in all the gold coins was now permitted to be 
either of copper alone, or of silver and copper, with the proviso 
that the silver should not exceed one-tenth of the alloy. In 
1890 the coinage of the dollar and of the three-dollar piece 
was suspended, and since then the smallest gold coin has been 
the quarter eagle. The gold dollar, although no longer coined,^ 
remains the standard unit of money, an ounce of standard gold 

1 Souvenir gold dollars were coined for the St. Louis and Portland 
expositions. 



454 Money, Nature and Value. [§ 188 

being accordingly now coined into ^18.60^ ; of fine gold into 
^20.67^. On June i, 1909, there were in the United States 
^1,644,900,733 of gold coin and bullion, of which ^605,243,- 
676 were in circulation or in the bank reserves. 

Originally the silver dollar was also standard money, and 
was in fact the only coin issued under the name of " dollar," 
a corruption of the German Thaler, abbreviated from Joa- 
chimsthaler or silver coin issued in the sixteenth century by a 
petty Bohemian potentate in Joachimsthal {i. e. St. James' 
dale). In 1792 the silver dollar was fixed at 371^^ grains 
pure, or 416 grains standard silver, the fineness being 892.4 
thousandths, with alloy of copper. In 1837 the fineness was 
increased to y^^ , in order to conform to that of the new gold 
coins mentioned in the last paragraph, and the weight of the 
dollar was accordingly, reduced to 41 2| grains. This was 
henceforth known as the standard dollar, the previous coin of 
416 grains being later on colloquially termed the " dollar of the 
fathers." For reasons to be mentioned hereafter the coinage 
of the "standard dollar" was discontinued in 1873, but again 
authorized in 1878, although now without free coinage and 
only in exchange for a limited quantity of bullion purchased 
by the government. In 1890 it was provided that after July 
I, 1891, the silver dollar should be coined only when neces- 
sary to redeem the treasury notes issued under that law. The 
further issue of treasury notes, however, was suspended in 
1893, ^'^d ^^th their gradual retirement the need of more 
silver dollars diminished, until with their disappearance the 
coinage of the silver dollars came to an end in 1904. The 
outstanding silver dollars are hence now in fact, although not 
in name, subsidiary or token money, because since the fall 
in the price of silver their face value is far superior to their 
bullion value, because since 1873 there is no free coinage of 
silver, and because since 1878 the silver dollars are legal 
tender only if not otherwise stipulated, and not legal tender a/ 
all for the redemption of the gold certificates. On June i, 



§ 1 88] Kinds of Money. 455 

1909, there were in the United States 563,985,81 2 " standard " 
silver dollars.^ 

The other coins of the United States are what in ofificial 
language are designated as " subsidiary silver " and " minor " 
or " token " coins. The " subsidiary silver " as provided for 
in the law of 1792 consisted of a half-dollar, a quarter-dollar, 
a dime, and a half-dime, all legal tender, and with weight and 
fineness proportionate to those of the dollar. In 1837 the 
fineness and the weight of the coins were altered to conform to 
the change in the dollar. In 185 1 a three-cent silver piece was 
added, one-quarter of the weight to be copper, and legal tender 
to 30 cents. In 1853 the weights of all the coins were re- 
duced in order to prevent their being melted down or exported, 
the half-dollar now falling from 206^ to 192 grains, with pro- 
portionate changes in the others. The coins were now also to 
be legal tender only to $5. In 1873 the weight of the half- 
dollar was slightly increased (to 192.9 grains, with the others 
in proportion), but the half-dime and the three-cent pieces 
were withdrawn. From 1875 to 1878 a twenty-cent piece was 
issued, and in 1879 the legal tender limit of all the subsidiary 
silver coins was increased to $10. The subsidiary silver coins 
at present are thus the dime, the quarter-dollar, and the half- 
dollar, the latter containing 1 73.61 grains fine instead of 185.62 
grains (one-half of 371^ grains of the silver dollar). On June 
I, 1909, there was in the United States a stock of $158,587,115 
of " subsidiary " silver. 

The " minor " or " token " coins were originally of copper. 
The law of 1792 provided for cents and half-cents of 168 and 
84 grains respectively. In 1857 the half-cent was discontinued 

1 For a few years we also had a " trade dollar." The law of 1873 
authorized the coinage of a heavy silver dollar (420 grains), which it was 
supposed might be used in the Orient. It was legal tender only to $5. 
In 1876 the legal tender quality was abrogated and the coinage was lim- 
ited. In 1878 the further coinage was prohibited except for " proof 
pieces," and in 1887 provision was made for retiring the outstanding 
issue. The total issue was $35,965,924. 



456 Money, Nature and Value. [§ 189 

and the weight of the cent reduced to 72 grains, 12 per cent 
now being composed of nickel. In 1864, when the present 
cent was first coined, the weight was further reduced to 48 
grains, 95 per cent being copper, and the rest an alloy of tin 
and zinc. A two-cent piece was also added, the legal tender 
of the coins being limited to 10 and 20 cents respectively. In 
1865 the legal tender quality was reduced to 4 cents, but a 
three-cent piece (i nickel) was added, legal tender to 60 cents. 
In 1866 provision was made for the coinage of a five-cent piece 
(75 per cent copper, 25 per cent nickel) of 77.16 grains and 
legal tender to one dollar. In 1873 the two-cent piece was 
discontinued, and the legal tender quality of all the minor or 
token coins was fixed at 25 cents. In 1890 the three-cent 
piece was discontinued. Thus at present we have a five-cent 
nickel and a one-cent bronze coin, each legal tender up to 25 
cents. 

We see, then, that although an official distinction is made 
between " standard " silver dollars, subsidiary silver, and minor 
or token coins, they are all in effect to be included in the cate- 
gory of subsidiary or token money, as opposed to gold which 
is the standard money. 

189. Value of Money. 

The price of a commodity is its value expressed in terms of 
money. Money, therefore, can itself have no price. Accord- 
ing to the laws of the United States an ounce of pure gold is, 
as we have seen, coined into ^20.67^, and we sometimes speak 
of this as the price of an ounce of gold. What is meant is that 
this sum is the mint price of an ounce of the bullion which can 
be used in the arts as well as for money. As soon, however, 
as the gold becomes money by being coined, it has no price ; 
it is $20.67^. 

But if money has no price, it, like everything else, possesses 
value. The value of money is its purchasing power, and can be 
learned only from the general level of prices. Prices of single 



§ 189] Value of Money. 457 

commodities may rise or fall because of relative variations in 
the forces which affect particular demand and supply. Wheat 
may rise as compared to cotton, or both wheat and cotton may 
rise as compared to iron. But there can be no change in the 
prices of all commodities unless there is a corresponding 
change in the value of money. A change in the general level 
of prices necessarily involves an alteration in the value of the 
commodity in which all prices are expressed. A change in the 
value of money means a change in its purchasing power : a rise 
in the purchasing power of money is a fall in general prices ; a 
fall in the purchasing power of money is a rise in general prices. 
The one does not lead to the other ; the one is the other. 

The value of money, like that of everything else, is an ex- 
pression of its marginal utility. The important point, then, is 
the location of the margin. We can approach the subject from 
the point of view of the capacity of money to do its work, or from 
that of the amount of work to be done. From the first point of 
view the location of the marginal increment is obviously affected 
by the number of increments, that is, by the supply of money. 
From the second point of view the amount of the work to be 
done implies the demand for money. 

Taking up first the demand for money, it is clear that we 
must not confuse this with the demand for the commodity 
used as money. Gold and silver, for instance, are used also 
as ornaments and in the arts and manufactures. The value of 
the precious metals is therefore affected by the non-monetary 
demand, or as it is sometimes called, the industrial con- 
sumption. The amount of gold and silver consumed by Asia- 
for non-monetary purposes is very large, but it has hitherto 
been impracticable to distinguish between their use for orna- 
ments and their use for money. In the United States close 
calculations are possible, because the government virtually 
monopolizes the sale of gold through its jewellers' and manu- 
facturers' bars, and receives accurate reports from the private 
refiners of silver. For other countries the estimates are not 



458 Money, Nature and Value. [§ 190 

quite so satisfactory. The figures as to the world's industrial 
consumption of gold and silver for 1907, exclusive of Asia, are 
as follows : '^ 





Gold. 


Silver. 


Annual 
Production. 


Industrial 
Consumption. 


Annual 

Production. 

(Fine Ounces.) 


Industrial 
Consumption. 
(Fine Ounces.) 


United States 
Other countries 

Total. . 


$90,435,700 
320,119,600 


$41,727,070 
94,313,430 


156,514,700 
128,499,923 


$24,369,784 
61,198,516 


$410,555,300 


$135,040,500 


$185,014,623 


$92,156,300 



If we add to this calculation an estimate for Asia, it would 
probably not be far from the truth to assert that the non-mone- 
tary demand is at present well-nigh one-quarter of the whole 
in the case of gold, and almost one-half of the whole in case of 
silver. Before the recent increase in the output of gold, the 
non-monetary demand was considerably more than one- 
quarter. 

While this estimate is larger than the one ordinarily found, 
it is none the less true that the chief demand for silver, and 
especially for gold, is the monetary demand. This consider- 
ation, coupled with the fact that the industrial demand is not 
subject to sudden variations, justifies us in regarding the mone- 
tary demand as the more important factor in the problem. 

190. The Nature of the Monetary Demand. 

At the outset, a widespread fallacy must be avoided. It is 
sometimes said that the demand for money is unlimited ; that 
money differs from other things in that the more of anything 
else we have, the less we want, while the more money we have, 

1 Arranged from the Report of the Director of the Mint upon the Pro- 
duction of the Precious Metals in the United States during the Calendar Year 
1905 yW- ", 30-34- 



§ 190] Nature of Monetary Demand. 459 

the more we want. This confuses money with general pur- 
chasing power or wealth. Everything salable has purchasing 
power. If we say that the more money a man has, the more 
he wants, we can equally well say that the more wheat he has, 
the more he wants. Yet no one would claim that the demand 
for wheat is for this reason unlimited. 

The demand for money is in fact even more limited and 
definite than that of most commodities. Wheat can be used 
for either consumption or exchange ; but while gold can be 
employed in industry, its use as money is primarily for ex- 
change. The chief use of an ordinary commodity is to con- 
sume it ; the chief use of money is to part with it. No one 
carries with him or hoards more than a small sum. It is not 
the money, but the money's worth, that constitutes his wealth. 
When we say that a man is trying to make money, we mean 
that he is trying to accumulate, not the mere pieces of coin or 
paper, but what he can procure by disposing of them. What 
he really wants is wealth, not money. 

Since the fundamental function of money is to serve as a 
medium of exchange, the demand for money can be recognized 
primarily in the volume of business. Here we meet another 
common error. It is often said that the value of money is 
measured by the total amount of commodities in existence. 
This is to be guilty of the confusion between desire and effec- 
tive desire. The real or effective demand for money is meas- 
ured by the commodities actually sold. It is the exchange, 
not the existence, of goods that expresses the demand for 
money as a medium of exchange. To measure this demand 
it would be necessary to ascertain the exact volume of all cash 
transactions at a given moment ; that is, the number of com- 
modities and services that are sold for cash, multiplied by the 
amount paid for each. Money, however, is needed also, as we 
have seen, as a reserve and as a store of value. In order, 
therefore, to ascertain the entire demand for money, we should 
have to add to the amount required for making actual ex- 



460 Money, Nature and Value. [§ 190 

changes the sums needed as reserves by the banks or govern- 
ments and the amount deemed necessary to be kept as cash in 
the pockets of the people and in the tills of the merchants. If 
it were possible to arrive at any accurate computation of these 
three facts we should know the entire demand for money. 

There is one other point in which the demand for money 
differs from that for other things. In ordinary commodities 
the demand is composed of three parts : the demand for im- 
mediate consumption, the demand for a reserve stock to be 
utilized in the near future, and the demand for more distant 
wants or for a stock " held for a rise." This last item depends 
largely on the potential supply. While the supply of wheat or 
cotton at a given moment may be entirely adequate to satisfy 
the demand for immediate consumption and for a short reserve 
stock, the actual sales of both "spot" and "futures" will be 
notably affected by the changing statistics of the " visible sup- 
ply " or the crop estimates. In the case of money, however, 
this third element in the demand is lacking. There is no po- 
tential or visible supply of money, and no stock that is held for 
a rise. People do not speculate in money because there are 
no changes in the price of money ; because in fact money has 
no price. Changes in the value, or purchasing power, of 
money express themselves, not in any visible change in money 
itself, but in the prices of commodities. It is true that when a 
country is on a paper basis with gold at a premium, we do find 
speculation in gold ; but in that case the paper is the real 
money and the gold is only a commodity. 

We have thus far spoken only of cash transactions. In con- 
sidering the use of money as a medium of exchange, however, 
we must not overlook the fact that many exchanges are made 
through the medium of credit. The study of credit must be 
postponed to a later chapter, but we may anticipate the con- 
clusions by stating that credit tends to lessen the demand for 
money, and thus to raise prices. The purchaser of a commod- 
ity may pay for it not in cash but by a note, check, or draft. 



§ i9i] Changes in Monetary Demand. 461 

With a given supply of money units, hence, credit increases 
the efficiency of each unit. Credit devices are to a certain ex- 
tent at least a substitute for money, and thus mean a relatively 
lessened demand for it. A relative decrease in the demand 
for anything implies a lower value, and a lower value of money 
is equivalent to a higher level of prices. Hence credit, by econ- 
omizing the use of money, tends to raise general prices. The 
strength of the tendency depends on the degree of the actual 
economy in the use of cash, for, as we shall see later, there must 
ultimately be a basis of cash for every superstructure of credit. 
In estimating the demand for money, therefore, we must 
always keep in mind the use of credit devices. 

191. Changes in the Monetary Demand. 

Changes in the monetary demand, and therefore to that ex- 
tent in the level of prices, consist of changes in the volume of 
business, in the amount of the bank reserves, in the quantity 
of hand-to-hand or till money, and in the use of credit devices. 
Let us discuss them in inverse order. 

(i) Nothing is more delicate than the mechanism of credit. 
Not only changes in the general mercantile habits of a com- 
munity, such as those recently introduced in Japan, but vari- 
ations in the conditions of business and even in the facts of the 
monetary situation, continually affect the extent of credit trans- 
actions, and thus react upon the demand for money and the 
state of prices. The value of money, therefore, so far as it de- 
pends upon the demand for money, is constantly fluctuating 
because of alterations in the volume of credit. The fuller 
treatment of this point must be postponed to a later chapter. 

(2) The demand for money as a store of value in the 
pockets of the people and the tills of the shop-keepers is 
subject to comparatively slight change apart from the growth 
of population and the increase of business transactions. The 
situation may, however, be modified by any sudden alteration 
in the habits of the people, as, for instance, by the recent growth 



462 Money, Nature and Value. [§ 191 

of automobiling, which has led thousands of people to carry 
with them far larger sums in cash to meet the possible fines 
for speeding. On the other hand, the growth in the use of 
checks for retail transactions may diminish the demand for 
hand-to-hand money. 

(3) The demand for money is subject to the continual 
changes which appear in the fluctuations of the bank or gov- 
ernment reserves. The amount of the reserve, as will be 
shown later, differs from country to country, not only owing to 
legal enactment and business usage, but because of the varying 
relation between bank notes and deposits. Moreover, seasonal 
fluctuations and international complications conspire to bring 
about marked oscillations in the amount of the reserve, and 
hence to that extent in the demand for, and the value of, money. 

(4) The demand for money as a medium of exchange — the 
most important constituent in the demand — obviously fluc- 
tuates with the extent of business transactions. In a general 
way, the volume of business grows with population. The 
simple per capita test, however, which is usually given in gov- 
ernment statistics, is no adequate criterion of the real demand 
for money ; for business may be bad with a larger population, 
and good with a smaller one. Moreover, we must be careful 
not to confuse the volume of exchanges with the volume of 
production. While these are frequently equivalent to each 
other, changes in business organization may diminish the one, 
while increasing the other. The producers ordinarily sell to 
the wholesale dealers, these to the jobbers or factors, and these 
again to the retailers, from whom the final consumers secure 
their supply. The monetary demand is measured by the 
aggregate of all these successive sales. A change in the char- 
acter of business whereby the producers sell directly to con- 
sumers, as in' the case of the Tobacco Trust, will reduce the 
number of the intermediaries, so that despite a possibly larger 
output the number of transactions and the consequent demand 
for money may diminish. 



§ 192] Monetary Supply. 463 

To the extent, then, that an increase of business means a 
greater volume of transactions, the tendency will be toward a 
greater monetary demand, a rise in the value of money and 
a fall in general prices. In actual life, however, this tendency 
may be completely outweighed by countervailing tendencies. 
For in the first place, the increasing monetary demand will, as 
we shall see, ordinarily lead to an increasing supply, so that the 
price level may be only temporarily afifected. Secondly, the 
augmented volume of business will probably be attended by an 
extension of credit, so that the result may be for quite a pro- 
tracted period a rise, instead of a fall, in prices. Since credit, 
however, always bears some relation to the supply of money, 
more business will in the long run require more money, if the 
price level is to be maintained. 

In short, the demand for money, like the demand for most 
things, is subject to all manner of subtle and unforeseen fluctu- 
ations. But however changeable and unpredictable the de- 
mand, it is obviously one of the two factors which fix the value 
of money or the general level of prices. 

192. The Monetary Supply. 

In discussing the monetary supply we must distinguish in the 
first place between the supply of the precious metals and the 
supply of money. For a portion of the supply of gold and 
silver is used for non-monetary purposes. In the second place, 
there is, as we have seen, no potential supply of money. The 
whole existing stock is virtually always at work. The actual 
supply of money is therefore capable of a relatively accurate 
computation. 

Assuming then that the quantity of money at a given time is 
known, what effect do changes in the supply produce on the 
value of money or the level of prices? This question cannot 
be answered without taking account of the rapidity of circula- 
tion. By rapidity of circulation is meant the average number 
of times that the pieces of money change hands within a given 



464 Money, Nature and Value. [§ 192 

period — say a year — in effecting sales. This is sometimes 
discussed under the head of the demand for money, because 
the greater the rapidity of circulation, the less will be the de- 
mand for money. It is, however, more properly mentioned in 
this place, because the rapidity of circulation bears the same 
relation to the quantity of money as the productivity of labor 
or capital to the number of laborers or to the amount of capi- 
tal. The one is a function of the other. The greater the pro- 
ductivity of the laborer, the smaller will be the number of 
laborers required ; the greater the rapidity of circulation, the 
greater will be the efficiency of each unit and the smaller will 
be the quantity of money needed. If, therefore, we centre 
our attention upon the chief function of money, — that of a 
medium of exchange, — and if we use the term "vohime of 
transactions " to signify the product of the number of commodi- 
ties sold, the number of times that they are sold in a given 
period, and the price at which the sales take place, the general 
law of money might be expressed in the equation : the quan- 
tity of money multiplied by the rapidity of circulation is equal 
to the volume of transactions in cash that are effected at a given 
price level. 

According to this law, if the volume of business and the 
price level remain the same, an increase in the rapidity of cir- 
culation means that a smaller quantity of money is needed ; 
and per contra an increase in the supply of money means a 
diminution in the rapidity of circulation. The rapidity of cir- 
culation, however, is affected not only by the quantity of money, 
but by the other factors in the equation, — the volume of busi- 
ness and the price level. When prices are rising and business 
is brisk, the turnover and hence the rapidity of circulation are 
apt to grow; when business is dull and sales are extremely 
slow, the circulation of money necessarily slackens. 

So far as the independent action of rapidity of circulation 
on prices is concerned, the influence is comparatively slight. 
For while communities differ greatly from one another, the 



§ 192] Monetary Supply. 465 

rapidity of circulation in the same community is normally the 
result of long-continued business usages, which alter but slowly. 
It is only in sudden emergencies like panics, when business 
comes almost to a standstill, that the rapidity of circulation 
abruptly declines, with a resulting fall in prices. But even here 
it is difacult to say how much of the fall of prices is due to a 
lessening of the rapidity of circulation, how much to a dimin- 
ished supply of money (which the banks will now hoard) in 
actual circulation, and how much to a contraction of credit 
which always accompanies a crisis. 

Disregarding, then, the rapidity of circulation, it might be 
claimed that an increase in the supply of money will lower its 
value or raise the price level. Jn one sense it is a truism to 
state that an augmented supply of anything will lower its 
value. If, however, by this is meant that the price of anything 
varies in a precisely inverse ratio to the supply, the statement 
is inexact, for the obvious reason that every change in supply 
normally affects the demand. As Gregory King pointed out 
in the seventeenth century, wheat will rise in price consider- 
ably faster than the supply falls. He estimated from the crop 
statistics of a series of years that a deficiency in the harvest 
of one, two, three, four and five tenths would raise the price 
three, eight, sixteen, twenty-eight and forty-five tenths re- 
spectively. In the same way, doubling the supply of wheat 
will not halve the price. In no two commodities does a change 
in the supply exert the same influence on the price, because 
in no two commodities is the "demand curve," which repre- 
sents the elasticity of the demand, the same. A distinction 
may even be drawn in this respect between metallic and paper 
money. In the case of paper or fiat money, where the value 
is due almost entirely to its use as money, an increase in the 
supply beyond a certain point is more directly reflected in a fall 
of value than in the case of gold or silver, which possesses in ad- 
dition a value as a commodity, and the demand for which 
is non-monetary as well as monetary in character. 

30 



466 Money, Nature and Value. [§ 193 

193. The Quantity Theory and the Cost Theory. 

It is obvious, therefore, that the famous "quantity theory" 
of money — the theory that the value of money depends on its 
quantity — is indefensible in this bald form. For the value 
of anything depends, as we know, neither upon supply alone 
nor upon demand alone, but is a result of the equilibrium be- 
tween supply and demand. So that in the law of money given 
above, the level of prices may be affected not only by changes 
in the rapidity of circulation as well as in the quantity of 
money, but also by changes in the volume of transactions. 
Moreover, the law of money there stated, although accurate so 
far as it goes, is not exhaustive, for two reasons. In the first 
place, when we speak of "the volume of transactions in cash," 
we disregard the credit operations which also vitally affect the 
demand. Secondly, in using the same phrase, the " volume of 
transactions " does not include the functions of money as a re- 
serve and as a store of value. These were discussed under the 
■head of demand for money, and properly so, because the 
needs of the community for money to serve these ends is dis- 
tinct from its need for money in making actual exchanges. 
But they might also have been discussed under the head of 
supply of money in so far as the amount of money resting in 
the pockets of the people in between actual sales or stored in 
the reserves of banks and governments must be added to the 
quantity employed in making actual exchanges in order to 
arrive at the entire supply of money in existence. From this 
point of view, therefore, the quantity of money which directly 
influences prices is primarily the quantity employed in making 
actual exchanges, that is, the entire amount of money in exist- 
ence less the sums utilized as a reserve or as a store of value. 
The more comprehensive law of money, then, may be summed 
up in the equation : the supply of money (less the sums used 
as a reserve and a store of value) multiplied by the rapidity of 
circulation is equal to the volume of exchanges in cash (as 



§ 193] Quantity and Cost Theory. 467 

modified by the credit transactions) effected at a given price 
level. 

While the quantity theory of money is therefore untenable 
in its crude form, it may nevertheless be employed to mean 
that, in the absence of relative changes in the other factors, a 
variation in the quantity of money will produce a change in 
the price level. In this sense the " quantity theory " is only 
an elliptical way of stating the ordinary law of demand and 
supply. There is an additional defence for the "quantity 
theory " in this sense, because when we come to examine the 
really controlling factors over long periods of time, we find that 
the emphasis can well be laid on the supply side, and espe- 
cially on the quantity of money. Thus the revolution of prices 
in the sixteenth century was due to the discovery of the Amer- 
ican silver mines- the fall of prices from 1873 to 1896 is 
ascribable to the fact that the output of gold did not keep 
pace with the increase of population and business ; and the 
great rise of prices from 1896 to the year 1907 was due to 
the immensely augmented production of gold. But on the 
other hand the gold discoveries of 1849-50 in California and 
'Australia, as we shall see in § 197, did not lead to a propor- 
tionate rise of prices because, in part at least, of the some- 
what fortuitous concurrence of a vastly increased demand for 
money. And for shorter periods, the influence of the mere 
quantity of money on prices is frequently outweighed by 
changes not only in the rapidity of circulation, but more 
especially in the various factors that make up the demand for 
money. 

Sometimes it is stated that the value of money depends 
upon its cost of production. This does not, however, involve 
any new principle. The only difference between money and 
other commodities is that the influence of cost of production 
upon the supply, and hence upon the value, of money works 
itself out more slowly. 

The value of money, it must be remembered, is not due 



468 Money, Nature and Value. [§ 194 

to the value of gold any more than the value of iron beams 
to that of iron ore. On the contrary, just as the value of 
iron ore is due to that of iron beams (and other iron prod- 
ucts), so the value of gold bullion is due to the value of 
gold money (as well as of gold used in the arts). Just as 
the value of any reproducible commodity tends to adjust 
itself to the point of marginal cost, so the value of money 
tends to adjust itself to the marginal cost of the money com- 
modity. A decrease in the expense of mining, such as that 
which has been effected by the modern cyanide process, ren- 
ders possible a far greater output. Since the precious metals, 
however, are exceedingly durable, this annual increment forms 
only a small fraction of the entire available supply, and will 
not produce any immediate change in value. In 1907, for in- 
stance, the annual production of gold was 411 and that of silver 
239 millions of dollars, while the world's stock was estimated 
at 7,042 and 3,531 millions respectively. While fluctuations 
in particular prices are often sharp and sudden, because of 
the insignificance of the stock on hand as compared to the 
quantities that can be produced at an altered cost, the varia- 
tions in the general price level due to changes in the cost of 
money are far more gradual. Sooner or later, however, an 
alteration in the rate of annual increase will make itself felt. 
A lower cost of production of money may hence be said to 
raise general prices, in so far as it augments the quantity of the 
money commodity. The cost of production theory thus re- 
solves itself into the quantity theory. 

194. Commodities and the Price Level. 

The level of prices may be affected by impulses starting 
from the side of commodities as well as from that of money. 
The price level in China differs from that in America. In 
Athens, in the time of Pericles, money was worth at least 
three times as much as to-day ; in America a century ago the 
purchasing power of money was far greater than at present. 



§ 194] Commodities and Price Level. 469 

The explanation is to be sought in the general conditions of 
demand and the circumstances of cost. Modern industrial 
methods lead to vast and varied consumption, to more effi- 
cient production and to higher wages. The greater command 
of wealth and the lower real cost to society are, however, ac- 
companied by the higher money prices that go with the aug- 
mented wages. In other words, the general price level tends 
to rise ; that is, more money is needed to effect the ex- 
changes. This can, however, come about only if there is an 
increased supply of money which adjusts itself to the newer 
price at a lower cost level. Thus, while diversified demand, 
augmented consumption and mass production set in motion 
an increase of prices, they must be accompanied by a reduc- 
tion in the relative cost of producing or acquiring the money 
commodity, if the rise is to be permanent. This is what 
happened in Germany a generation ago, and what is happen- 
ing on a far greater scale in Japan at present. 

It is, however, an egregious error to think that a change in 
the general price level can mean anything but a change in the 
value of money. The impetus may indeed come from the 
side of commodities, but this necessarily denotes a change in 
the demand for, and hence in the value of, money. It has 
been contended by writers like David A. Wells that the great 
fall of prices from 1873 to 1896 did not imply any apprecia- 
tion of money because it was due to decreased costs of pro- 
duction of all commodities. It is doubtless true that the 
decreased cost of a single commodity will lead to a fall in its 
price, and hence in its value as compared with other articles. 
But while decreased costs of all goods may lead to lower gen- 
eral prices, they cannot lead to lower general values. 

If there is a reduction of one-half in the cost and price of 
A, there will be a fall in its value relatively to B and C ; but 
as soon as there is a similar reduction in the cost of B and C 
and the rest, while there will be a corresponding fall in their 
price, the relative values will be readjusted. The value 



47^ Money, Nature and Value. [§ 195 

(though not the price) of A will now rise until at the end the 
values in relation to one another will be the same although 
the prices of all have fallen. The fall of general prices, there- 
fore, does not mean a fall in the respective values of the 
goods, but is an appreciation of money. Had the quantity of 
money (and credit) increased proportionately to the augmented 
demand caused by the larger volume of business, there could 
have been no fall in general prices. Prices rose because the 
demand for money increased faster than the supply. Since 
1897 the progress of invention and of lower costs of produc- 
tion has continued as actively as in the preceding decades, 
but the lower costs have been attended by higher prices, not 
by lower prices, because the increasing demand for money has 
been outstripped by the still greater supply. Any change in 
the general price level is a change in the value of money. 

195. Determination of the Price Level. Index Numbers. 

Because of the fact that values of commodities as well as of 
money itself are constantly changing, it is not always easy to 
measure with precision the variations in the purchasing power 
of money. The best expedient is that suggested by Evelyn 
in 1 798, by Lowe in 1822, by Scrope in 1833, and by Porter in 
1836, but elaborated by Jevons in 1863, and known as the in- 
dex number. Here the price of an article at a given time, or 
its average price during a given period, is taken as a basis and 
called 100. If at the next selected date the price has risen 
one-tenth, it would be assigned the figure no. By choosing 
a number of dififerent articles and taking the average of the 
figures as they vary from the base line of 100, we reach the 
index number. 

The percentage of change in the value of money is obviously 
not the same as the percentage of change in the general price 
level. If general prices double, that is, if the index number in- 
creases from 100 to 200, each unit of money will buy only half 
as much as before, or, in other words, the value of money will 



RELATIVE WHOLESALE AND RETAIL PRICES OF FOOD, 
IN THE UNITED STATES, 1890 TO 1907. 

[AVERAGE PRICE FOR 1890 TO 1899=100.] 



REUTIVE 

PRICES 


1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 


122 

120 

118 

116 

114 

112 

110 

108 

106 

104 

102 

100 

98 

96 

94 

92 

90 

88 

86 

84 

82 










































































i 






































/ 


\ 




































/ f' 1 




/ 


1 




























^ 


\ 


\ 




f 


\ 




























y r 


V 








\ 




















/ 


'. 






/ 










\ 


/ 


\ 
















./ 


s 




^^' 










\ 


I 


\ 
















<^ 




r — 














\ 


/ 


\ 














r^^ 






















>" 


s\ 












f^ 


/ 
























^ 








































^N 








X 


f 




























\, 


^ 






/ 






























> 








/ 
































1 




/ 


































y 




/ 


































\ 




/ 


































\ 






































\ 


/ 





































































































WHOLESALE PRICES. 



.RETAIL PRICES. 

From U.S. Bulletin of Labor, 77 (1908) 



RELATIVE WHOLESALE AND RETAIL PRICES OF FRESH BEEF, 
1890 TO 1903. 











[AVERAGE PRICE FOR 1890 TO 1899=100.1 










"p^c'eT 


1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 


126 

124 

122 

120 

118 

116 

114 

112 

110 

108 

106 

104 

102 

100 

98 

96 

94 

92 

90 






















































1 


) 




























/ 


\ 




























< 


\ 




























t 


l\ 






























\ 






























\ 






























\ 


























> 




\> 


























/ 


f 


1 






















/ 


\ 


/ 


f 


1 






1 

1 


\ 


/ 


V 










/ 


.^' 




/ 


\ 




\ 


t 


\ 


/ 








t>^ 




'"-^ 


1 








1 


\ 


/ 


\ 


/ 


■X— 




<^ 















— 


— $ — 

1 






' 


' — 


\ 


/ 

/ 














— 




/ 










\ 


/ 
















— 












\ 


/ 
















r 










\ 


t 















































--- = WHOLESALE PRICES. 



.=RETAIL PRICES. 
From U.S. Bulletin of Labor 54 (1904) 



RELATIVE PRICES OF RAW AND MANUFACTURED COMMODITIES, 
1890 TO 1908. 

[AVERAGE PRICE FOR 1890 TO 1899=100.] 



REUTIVE 


1890 1891 1893 1893 1894 1895 1896 1897 1898 1899 1900 1901 1903 1903 1904 1905 1906 1907 1908 


136 
134 
133 
130 
138 
136 
134 
133 
130 
118 
116 
114 
113 
110 
108 
106 
104 
103 
100 
98 
96 
94 
93 
90 
88 
86 
84 




















































































































,\ 






































/ 


\ 






































/ 


\ 




































/ / 


\\ 




































/ 


/ 


s 






























- 


^ 




/ 


/ 


s 




























/ 




'X 


^- 




f 






























/ 




" 


/' 
































/ 








/ 










" 


\ 


























/\ 


f 












\ 




















/ 






/ 














, \ 
























— -^ 


/ 














\ \ 
















/ 1 


^^"■^^ 


^,,^ 




















\ 


s. 














/ / 


























N 


\ 










t 




























V\ 










1 






























\\ 










f 






























\\ 










t > 






























\\ 










l/ 






























\ 


"^ 










































"^•s^^ 




.^ 




































k 


■^»v^ 


'<' 






































f 


































\ 


y" 




































\ 


/ 












































\ 

















.RAW COMMODITIES. 



.MANUFACTURED COMMODITIES. 

From U.S. Bulletin of Labor,81 (1909) 



CHART SHOWING COMPARATIVE MOVEMENT 

OF WHOLESALE PRICES IN THE UNITED STATES 

GREAT BRITAIN, AND GERMANY, 1878 TO 1901. 



PER- 
CENT 

120 

115 

110 

105 

100 

95 

90 

85 

80 

75 
70 










1 






















A. 






-UNITED 


STATES.I 










/ 


\ 






















B+++ + + GREAT BRITAIN. 
C GERMANY. 








>'^^ 


/ 


\ 
























E 


i^/ 


b/< 


"S 


■\ 














\ 


























C// 






""1 


-v 












/ 


• \ 




































V 


— 


-*^ 




^' 






^ 
















c 








/ 










^ 


^^ 




/^ 


^)/ 


kn 


H^ 


V^' 


> 












r* 


+■*- 


B 




A 














>» 


U-*- 










'''^^^ 


\ 








/ 


'*t- — 

y/ ^ 


A 


































N 


Hi.-, 




-^- 


^:> 












































"^1V 


^ 












































^</ 










I^ODCOCOOOCOOOCOOOCOOOOCTOOSO 05C5CI5C50500 

I^JCOCOCOCOOOCOOOOOOOCOCOOOOOCOOO 00COQ00000COO5 
""'-I'-Ht-li-lT-li-lrtrHr-l'-li-Hi-lr-l rHrHrHi-lrHrH'"' 



From Report of the U.S. Industrial CommissionjVol. XIX. 



§ 195] Determination of Price Level. 471 

fall one-half. A rise of prices of 15 per cent, or a change in 
the index number from 100 to 115, during one year means 
that the purchasing power of 100 cents at the end of the year 
is \^^ or 86.95 P^^ ^^^^ of its purchasing power at the begin- 
ning. This is equivalent to a loss of 13.05 per cent. A rise 
of 15 per cent in the general price level thus equals a fall of 
13.05 per cent in the value of money. The change in the in- 
dex number shows the alteration in the price level ; the change 
in the reciprocal of the index number shows the change in the 
value of money. 

The utility of the index number depends partly on the num- 
ber and choice of commodities, partly on the decision to use 
retail or wholesale prices, partly on the kind of average 
employed. 

(i) It is obvious that the larger the range of commodities 
selected, the less will be the chances of error arising from 
sudden fluctuations in the price of any single one. Even if 
we take a large number of ordinary articles, however, there 
still remain two important classes as to which it is exceedingly 
difficult to quote accurate price lists. One is the price of real 
estate, or house and land rent ; the other is the price of labor, 
or general wages. The almost universal exclusion of these 
categories undoubtedly impairs the accuracy of the index 
number. 

(2) While there is a general correspondence between whole- 
sale and retail prices, there is no precise relation. It is well 
established that retail prices fluctuate less than wholesale prices, 
because they are more dependent on custom and not so read- 
ily altered. This is apparent from the charts opposite pages 
470 and 471. Since it is impracticable to compute the pro- 
portion of retail to wholesale transactions in various commodi- 
ties, the index number must be confined either to the one or 
to the other, with a necessarily resultant lack of precision as to 
the actual purchasing power of money in all transactions. 

(3) The ordinary average is the arithmetic average, where 



472 Money, Nature and Value. [§ 195 

the figures representing the variation from the base line of 100 
are added together, and the aggregate is divided by the num- 
ber of commodities used. This average tends to exaggerate 
the influence of rising prices. To take an extreme example, 
suppose that A has trebled in price while B has fallen two- 
thirds in price. Then : 

A changes from loo to 300 

B " " 100 '' 33I 

Total change 200 to 333J 

Index number changes from . . . 100 " i66f 

Yet the value of money has not altered, for the purchasing 
power has gained as much in the one case as it has lost in the 
other. As a consequence, statisticians often utilize the so- 
called geometric average which is found by multiplying a num- 
ber of quantities and extracting a root equivalent to that 
number. In the above case the geometric mean would be the 
square root of the product of the two prices, or 100. Some- 
times to secure still greater precision, use is made of the har- 
monic average, or the reciprocal of the arithmetic average of 
the reciprocals of the quantities. Finally there is still another 
choice, known as that between the simple and the weighted 
average. Weighting means assigning to each article an im- 
portance proportionate to the amount sold or to some other 
criterion which distinguishes one commodity from another. 

In practice, however, it has been found that there is not 
enough difference between these various methods seriously to 
impair the value of the result, which can at best only be ap- 
proximate. The most familiar index-numbers are those of 
Messrs. Jevons, Palgrave, Soetbeer, Sauerbeck, Falkner and 
Commons, of the London Eco?iomist, Dun^s Weekly and the 
United States Bureau of Labor.^ Without their use it is vir- 

1 For details, see above, § i86. They are all explained at considerable 
length in the Bulletin of the Department (now Bureau) of Labor, No. 39, 
1902. 



§ 195] Determination of Price Level. 473 

tually impossible to make more than a mere guess at the rise 
or fall in the general price level. An adequate discussion of this 
subject belongs more properly to the science of statistics. It 
will be of interest nevertheless to append herewith (page 474) 
a table showing the changes in the general price level for the 
last quarter of the nineteenth century in the United States as 
compared with Great Britain and Germany.^ On the chart 
opposite page 471 the same facts are illustrated by lines in- 
stead of figures. In the table on page 423 the system of index 
numbers is likewise employed. Finally, in order to bring the 
facts down to date we add on page 474 the index numbers of 
wholesale prices in general, as well as of wholesale and retail 
prices of food for the United States from i8go to 1906, showing 
the great depression culminating in 1897 and the remarkable 
rise thereafter.^ 

196. The Transmission of Price Changes and the 
Distribution of Money. 

Variations in the price level are not uniform or instan- 
taneous over the whole economic field, but propagate them- 
selves in waves from commodity to commodity and from country 
to country. When, for instance, a miner brings in his gold 
dust or nuggets, he deposits them in the nearest sub-treasury, 

1 From United States Industrial Commission Report XIX, 38. The 
index numbers for the United States are those of Commons ; for Great 
Britain, those of Sauerbeck ; for Germany, those of Conrad. The index 
numbers for Great Britain, as originally compiled, are based on the prices 
for the years 1S67-1877, but have been converted to the base of 1879- 
1889 for comparison. The index numbers for the United States are for 
the crop or fiscal year luly i to June 30, while those for Germany are 
calendar years, and those for Great Britain are calendar years, 1879-1883, 
and thereafter crop years. 

2 Bulletin of Bu7-eati of Labor, No. 69, 1907, p. 250 and No. 65, 1906, 
pp. 186, 189. The base of 100 in each case is the average price for the 
years from 1890-1899 inclusive. The index number of wholesale prices 
is based upon 258 representative staple commodities. The wholesale 
prices of food are based on 54 articles, the retail prices on 30 articles of 
food. In the case of retail prices the weighted average is used. 



474 Money, Nature and Value. [§ 196 



COMPARATIVE MOVEMENT OF WHOLESALE PRICES IN 
THE UNITED STATES, GREAT BRITAIN AND GER- 
MANY, 1878 TO 1901, AVERAGE PRICES FOR 1879-89 
BEING 100. 



Year. 



United 
States. 



Great 
Britain. 



Germany. 



878-79 . 
879-80 . 
880-81 . 
881-82 . 
882-83 . 
883-84 . 
884-85 . 
885-86 . 
886-87 • 
887-88 . 
888-89 • 
889-90 . 
890-91 . 
891-92 . 
892-93 . 
893-94 . 
894-95 . 
895-96 . 
896-97 . 

897-98 • 
898-99 . 
899-1900 
900-1901 



107 
107 
120 
III 
102 

94 
90 
90 
93 
94 
90 

95 

90 
90 
82 
81 

n 
73 
79 
77 
90 



112 
107 
114 

no 

108 

106 
95 
91 



93 
93 
93 
91 

87 
85 
79 
79 
79 
82 

84 
93 
94 



102 

IIO 

107 

104 

103 

99 

94 

97 

94 

97 

100 

106 

98 

95 
92 

83 
82 
82 
83 



MOVEMENT OF WHOLESALE AND RETAIL PRICES IN 
THE UNITED STATES, 1890-1908. 





Relative 


Wholesale 


Retail 




Relative 


Wholesale 


Retail 


Year. 


Wholesale 


Prices of 


Prices 


Year. 


Wholesale 


Prices of 


Prices 




Prices. 


Food. 


of Food. 




Prices. 


Food. 


of Food. 


1890 


1 1 2.9 


II2.4 


102.4 


1899 


1 01 .7 


98.8 


99-5 


1891 


III.7 


"5-7 


103.8 


1900 


1 10.5 


104.2 


101. 1 


1892 


106.1 


103.6 


IOI.9 


1 901 


108.5 


105.9 


105.2 


1893 


105.6 


II0.2 


104.4 


1902 


1 12.9 


III.3 


110.9 


1894 


96.1 


99.8 


99-7 


1903 


113.6 


107.1 


110.3 


1895 


93-6 


94.6 


97.8 


1904 


"3 


107.2 


111.7 


1896 


90.4 


83.8 


95-5 


1905 


115.9 


108.7 


112.4 


1897 


89.7 


87.7 


96.3 


1906 


122.4 


112.6 


116.1 


1898 


934 


94-4 


98.7 


1907 
1908 


129.5 
122.2 


117.8 


120.7 



§ 196] Transmission of Price Changes. 475 

taking in return cash and bank drafts. A part of this he 
may spend on articles which for that very reason tend to rise 
in price. But most of his annual output will be deposited 
in the banks, whose reserves are thereby increased to such 
an extent that they will send the funds to New York to be 
loaned on call on the exchanges for transactions in securities 
as well as in cotton and wheat. The lower rates " for money " 
will tend to increase the dealings in, and ilje prices of, the 
great speculative staples, while the higher prices of railroad 
securities and industrials will tend to augment the demand 
for railroad supplies and the raw materials of industry. Grad- 
ually the banks will increase their loans to the ordinary mer- 
chant, thus stimulating the demand for commodities and 
ultimately for labor. It is largely for the reason that they are 
more amenable to speculative influences that, in a period of 
rising prices, as Cairnes pointed out, crude products rise more 
than manufactures and animal more than vegetable products, 
while wages are almost always the last to advance. A broader 
generalization, however, would be that the rise in prices is first 
noticeable in stocks and bonds, then in speculative staples, 
next in ordinary commodities, then in retail prices, and finally 
in labor and land. The same progression could easily be 
shown in the case of falling prices. 

In the meantime, however, the perturbation of prices is 
transmitted from country to country. The distribution of 
metallic money is in large measure the result of international 
forces. Some commodities have an international, others only 
a local, market ; the price level in each country is a result of 
both considerations. Every nation will, under normal condi- 
tions, secure enough money to preserve this relative price 
level. If there is an abnormal increase in the quantity of gold 
in one country, it will tend to produce higher prices, augment- 
ing imports of commodities and exports of gold until the 
equilibrium is restored at a somewhat higher level. The pro- 
cess may indeed be retarded by various influences. If the 



47^ Money, Nature and Value. [§ 197 

increased supply of gold comes from the mines, it may be ex- 
ported at once, or it may go to the bank reserves and flow out 
under general banking operations without at once sensibly 
affecting the general price level. Or the international trans- 
actions may take place in securities rather than in commodi- 
ties. Or, finally, through the intervention of credit transactions, 
there may be a temporary change in prices unaccompanied by 
any movement of gold. As the prices of securities, however, 
are ultimately dependent on the price level of commodities, 
and as all credit rests at bottom on the basis of coin, there 
can be no long-continued disarrangement of the equilibrium 
without setting into motion the forces working for its re- 
establishment. 

The equilibrium is one between relative price levels, which 
is only another way of stating the relative amounts of metallic 
money in each country. Any sudden alteration in the use of 
credit devices will exert its temporary effect ; but in the long 
run there is a correlation between the price level and the 
money supply. Under healthy fiscal conditions, that is when 
the currency is on a metallic basis, the amount of money in 
any country will be self- regulative and adequate to maintain 
the relative price level. In other words, as we shall see later 
from another point of view, the international distribution of 
the precious metals accommodates itself to the international 
trade which would take place if there were no money at all. 
Since money is the instrument of trade, the distribution of 
money follows the condition of trade and not vice vej'sd. A 
change in the level of prices in any one country will gradually 
transmit itself to all other countries with which it has interna- 
tional dealings until the equilibrium is restored at the higher 
or the lower level. 

197. The Stability of Money. 

Since the purchasing power of money is reflected in the level 
of prices, an appreciating standard is equivalent to lower prices 



§ 197] Stability of Money. 477 

and a depreciating standard to higher prices. The instability 
of the value of money as shown by its appreciation or depre- 
ciation leads to important results. 

If the standard appreciates, that is if prices fall, because the 
supply of money does not keep up to the demand at the old 
level, the first consequence in countries like the United States, 
at all events, is apt to be noticed in the stock market. As the 
bank reserves decrease, because of the relatively declining sup- 
ply of money, the banks call in their loans, and interest rates on 
call loans are apt to increase for a time. Speculators first in 
securities and then in staple commodities tend to sell their 
holdings at a sacrifice, and there develops what is called a 
"bear" market. As the fall in prices reaches general indus- 
try, profits are curtailed in some businesses and enterprise 
slackens. Raw materials are indeed cheaper, but the manu- 
facturers cannot market their goods at satisfactory figures and 
lose money. With the falling off in the demand for new capi- 
tal, interest rates in general will finally fall. 

Thus the farmer, the merchant, the manufacturer and the 
banker all in turn suffer from the falling prices and the " bad 
times " are ushered in. No one realizes that the trouble is 
due to any general change in monetary conditions, but all 
ascribe the depression to over-production or other special 
causes. It might seem that the laborers are relatively better 
off, because their wages are the last to fall. But in reality the 
lack of prosperity affects them equally, because the employers 
either lay off part of the laborers or work on half time, or 
close altogether. The professional classes suffer because of 
the decline of business. Borrowers are embarrassed because 
they must work harder to pay back an equivalent sum of 
money. Owners of land and of corporate shares will get less 
rent and less dividends. There are only two classes who do 
not suffer, — those in receipt of a fixed income, like teachers and 
government officials, who will benefit, until such time as their 
salaries are cut down ; and bondholders (as distinct from 



478 Money, Nature and Value. [§ 197 

stockholders), who, receiving a fixed sum while the general 
rate of interest is falling, will see the capital value of their 
bonds appreciate, provided that the security of their mortgage 
is not impaired by the diminishing prosperity of the respec- 
tive railroad or industry. In the main, however, the " bad 
times " are general. 

A depreciating standard, or a rise in prices, such as that 
which the world has witnessed from 1896 to 1907, produces 
the opposite effect. Some classes are benefited, some are 
injured. If the gold is produced in the country, as in the 
United States, the increasing supply will swell the bank reserves 
and for the time reduce the rate of interest on call money, 
benefiting borrowers, and tending to produce a " bull market " 
by putting up the price of stocks. If the increased supply of 
gold comes in to a country in return for extra exports to the 
gold-producing countries, the effect on interest will be slighter 
at first, and that on prices more immediate. In either case, 
however, stocks and speculative commodities rise in price. 
Debtors benefit, because they have to work less to repay their 
obligations. On the other hand, the salaried and wages 
classes find it difficult to subsist on their accustomed stipends, 
and there is a concerted movement looking to the demand for 
increased wages, which with real estate are the last to rise. 
But profits increase with the rising prices, and the resulting 
activity in business will not only increase the demand for raw 
materials and thus the gains of the farmer, but will also aug- 
ment the demand for new capital, and thus tend ultimately to 
raise the rate of interest and to increase the prosperity of the 
financial sections of the community. But with a rise in 
interest, the price of bonds will fall. In the main, however, 
the community feels itself prosperous, and the danger now is 
that production may be artificially stimulated and that the ; 
result may be a speculative mania culminating in a crisis. 

Thus both rising and falling prices create an unstable equilib- 
rium which means disturbance in industry and unequal gains 



§ 197] Stability of Money. 479 

or losses to different classes. It is not high or low prices as 
such which do the harm, but rising or falling prices. 

While many factors, as we have seen, influence the value of 
money or the level of prices, the one of chief importance is 
the output of the precious metals used as money. The figures 
will be found on page 491. Between 1570 and 1640, when 
the enormous new supplies of silver from America were making 
themselves felt, prices rose from 200 to 300 per cent, consti- 
tuting the famous " Revolution of Prices." In the nineteenth 
century we have had several cycles of severe fluctuations. Be- 
tween 1790 and 18 10 prices rose about 80 per cent, between 
1810 and 1850 they fell about 60 per cent, the supply of silver 
being cut off by the political disturbances in South America, 
and that of gold not increasing sufficiently to keep pace with the 
expanding industry. From 1850 to i860 came a rise of prices 
of about 20 per cent, due to the gold discoveries. That the 
rise was not still greater is due partly to the drain of silver to 
India, but chiefly to the enlarged demand for money which ac- 
companied the increase of business transactions, resulting from 
the revolution in the media of transportation. From i860 to 
1873 '^he price level remained relatively stable, rising consider- 
ably, however, from 1870 to 1873, owing to the speculation 
which culminated in the crisis of 1873. From 1873 to 1896 
prices fell almost 60 per cent, as a result of the relative diminu- 
tion in the output of gold. Since 1896 the prodigious increase 
in the production of gold has caused another era of rising prices 
which by 1907 amounted to over 50 per cent. 

These fluctuations in the price level have only recently been 
recognized as an evil. No practical method has yet been dis- 
covered to reduce them to a minimum. Of the discredited 
scheme of bimetallism we shall speak in the next chapter. 
Perhaps the best-known proposition is that of the so-called 
multiple or tabular standard.^ The unit of measure would here 

1 Many other standards have been proposed. Walsh, who has de- 
voted an entire volume to this topic, sums them up in Fundamental Prob- 



480 Money, Nature and Value. [§ 197 

be the aggregate price of a number of commodities, whose 
values might be reached by a method of index number. Even, 
however, if such a system were practicable, — a fact open to the 
most serious question, — it may be impugned on the ground 
that for short-time debts it is not needed, and for long-time 
debts there is no assurance that the two parties will be put in 
a more equal position than if ordinary money is used. By 
returning the same amount of goods as is sought to be accom- 
plished by the tabular standard, the advantage of a rise of 
price would accrue to the creditor, and that of a fall to the 
debtor. With all its shortcomings, therefore, the gold stand- 
ard seems to be the one which involves the least injustice to 
both. Moreover, even where there is an appreciation of the 
money standard the increased burden on the debtor tends, as 
we shall see (§ 222), to be offset, in some measure at least, by 
a reduction in the rate of interest. Until, therefore, a more 
practicable scheme is devised, it is altogether probable that 
the business world will have to content itself with a money 
unit which, like the gold standard, is exposed to the inevi- 
table fluctuations in value that are incident to all articles of 
human desire and that are so largely influenced by the bounty 
of nature. 

lent in Monetary Science, part 4, as the commodity, wages and cost 
standards. Edgeworth, in pp. 162-164 of his Report of 1889, mentioned 
in § i86, discusses them under the names of the capital, consumption, 
currency, income, indefinite production and wages standards. Kinley, 
Money, ch. xiii, mentions the labor time, labor cost, disutility of labor, 
marginal utility, total utility and purchasers' surplus standards. 



CHAPTER XXIX. 

MONEY, PRACTICAL PROBLEMS. 

1S8. References. 

J. F. Johnson, Money and Currency (n. d., 1905), chs. ix-xvii ; F. A. 
Walker, Money (1878), parts i and ii; W. S. Jevons, Investigations in Cur- 
rency and Finance (1884) ; N. G. Pierson, Principles (1902), part 2, ch. i; 
J. S. Nicholson, Principles (1901), bk. iii, chs. xi-xiv; H. White, Money 
and Banking (2d ed., 1902), parts i and ii ; W. A. Shaw, The History of 
the Currency ( 1896) ; Earl of Liverpool, Treatise on the Coins of the Realm 
(1805, new ed., 1880) ; C. A. Conant, The Principles of Money and Bank- 
ing (1905), vol. i ; M. L. Muhleman, Monetary Systems of the fForld {i8g6) ; 
Major Leonard Darwin, Biweta/lism (189S) ; J. L. Laughlin, The History 
of Bimetallism in the United States (2d ed., 1894); IL P. Willis, History 
of the Latin Monetary Union (1901) , H. B. Russell, International Monetary 
Conferences (1898); A. D. Noyes, Forty Years of American Finance 
(1909) ; J.J. Knox, United States Notes (1884) ; S. P. Breckenridge, Legal 
Tender (1903) ; W. C. Mitchell, A History of the Greenbacks (1903) ; brief 
historical summaries of the currency question in the United States, D. 
R. Dewey, Finattcial History of the United States (American Citizen 
Series, igoj), passim ; Count Matsukata Masayoshi, Report on the Adoption 
of the Gold Standard in fapaii (1S99) ; United States Commission on In- 
ternational Exchange, Reports on the Introduction of the Gold Exchange 
Standard into China, the Philippine Islands, Panama and other Silver-using 
Countries, and the Stability of Exchange (1903 and 1904) ; G. F. Knapp, 
Die staatliche Theorie des Geldes (1905). 

199. Coinage Problems. Seigniorage and Debasement. 

The term free coinage is employed in two senses. If the 
government makes no charge for converting bulUon into coin, 
the coinage may be said to be free. On the other hand, 
free coinage may mean the right of any owner of bulhon to 
have it converted into coin. When we commonly speak of 
the free coinage of silver we employ the term in this second 
sense. The real distinction that ought to be observed is be- 
tween free and gratuitous coinage, the former implying the 
31 481 



482 Money, Practical Problems. [§ 199 

right to have bulUon converted into coin, the latter being 
coinage without any charge. There may be free coinage, with 
or without gratuitous coinage. 

Another term susceptible of several meanings is seigniorage. 
Ordinarily it signifies the charge made by government in re- 
ceiving bullion at its market value, and deducting a certain 
amount before or after coinage. It involves to this extent a 
difference between the bullion and the mint value of the coin, 
and it was this difference which accrued to the mediaeval 
seigneur or local potentate who had the monopoly of coinage. 
But where, as in the United States, owing to a fall in the mar- 
ket price of the bullion, the government purchases a quantity 
of silver for fifty or sixty cents and converts it into a silver 
dollar, the difference, which is officially called " gains " and 
put into the " silver-profit fund " (or in the case of the sub- 
sidiary silver into the '* minor-coinage-profit fund "), is also 
popularly called seigniorage. 

Sometimes a further distinction is made between seigniorage 
(in the first sense) and brassage or mint-charge proper. Bras- 
sage is the sum levied to cover the actual cost of preparing the 
bullion to be coined, while seigniorage would then be a sur- 
plus charge representing a net gain to the government. This 
distinction is, however, not always observed. In England the 
mediaeval charges were divided between the king and the mint, 
seigniorage proper being abolished in 1666. In the United 
States the law of 1792 provided for gratuitous coinage, but 
imposed a charge of ^ of i per cent if the coins were de- 
manded at once. The act of 1853 levied a general seignior- 
age of ^ of I per cent, but when free coinage of silver was 
abolished in 1873 the seigniorage on gold was reduced to ^ of 
I per cent, and finally disappeared in 1875. The government, 
however, still makes a charge, as fixed by the Director of the 
Mint, to cover the actual cost of preparing the bullion for 
coinage. In France seigniorage is effected by withholding 
some of the coins, instead of the bullion, — in the case of gold, 



§ 199] Seigniorage and Debasement. 483 

seven francs out of the 3100 into which a kilogram of gold is 
coined. 

Seigniorage is thus used in three senses : (a) mint-charge 
proper or brassage, to cover the cost of coinage, and techni- 
cally a fee ; (<^) an additional charge in the nature of a tax ; 
and (r) the gain or profit arising from converting bullion of a 
low market value into coins with a high face value. Seignior- 
age exists in the United States only in the first and third 
senses. In whatever sense the term is used, however, the im- 
position of a seigniorage always involves a discrepancy be- 
tween the value of the coin and that of the bullion in the 
coin. 

A discrepancy between the original value of the bullion and 
that of the coin may occur for three further reasons : abra- 
sion, mint accidents and debasement. 

( 1 ) Abrasion denotes the loss of weight by use. There is 
generally a limit of tolerance below which coins forfeit their 
legal-tender quality. In the United States the tolerance is h 
of I per cent of the weight of the gold coins within twenty 
years from the date of coinage, or a proportionate loss for a 
smaller period. 

(2) Accidents in minting involve the so-called remedy or 
deviation. Since the mechanical operations of the mint are 
not mathematically exact, there will, always be a slight varia- 
tion in the contents of the new coins. Remedy is the amount 
of variation permitted by law from the exact standard of either 
weight or fineness of the new coins. In England the annual 
test is called the " trial of the pyx." In the United States, 
where the " pyx " or box is also used, the " trial of the coins " 
is conducted by the Assay Commission. Here the legal de- 
viation for weight is a half grain for eagles and double eagles, 
a quarter grain for half and quarter eagles, one and a half 
grains for the silver coins, one-hundredth of an ounce for five 
thousand dollars worth of gold coins or for one thousand sil- 
ver dimes weighed together, and two-hundredths of an ounce 



484 Money, Practical Problems. [§ 199 

for one thousand of any other silver coins weighed together. 
The limit of deviation from standard fineness is one-thou- 
sandth in gold ingots and three-thousandths in silver ingots. 

(3) Debasement can take place in three ways : (a) by 
diminishing the weight of the metal from which the coin is 
made ; (^) by raising the nominal value of a coin and making 
it legal tender at a higher rate than before ; and (c) by lower- 
ing the standard or fineness of the metal. 

(d!) When the weight of the metal is diminished by private 
individuals, it is called clipping or sweating. But it was 
formerly also practised by governments. The English pound 
was originally a pound of standard silver, coined into 240 
pence. By 1550, as a result of successive debasements, it 
was cut into 864 pence, or 72 shiUings. In 1600 it was 
coined into 744 pence, or 62 shiUings, and remained at that 
figure until 18 16, since which time a pound of silver has been 
coined into 792 pence, or 66 shillings. As silver was, how- 
ever, made token money at this date, the last change cannot 
properly be termed a debasement. In the same way the sil- 
ver livre at the time of the French Revolution weighed only 
1^ as much as the liber or pound of Charlemagne, of which 
it was the direct descendant. Similar changes have taken 
place in the weight and value of the German mark and the 
Portuguese milreis ; while in some cases, in lieu of diminish- 
ing the weight of the metal, governments have seen fit to alter 
the material. So the florin, now a silver coin, was originally 
a gold coin ; and the Spanish maravedi, which was at first 
made of gold, is now made of copper. 

(J/) Debasement by raising the nominal value of the coin 
was common in mediaeval Europe, especially with the gold 
pieces, a new coin with a different name, but with the nominal 
value of the old coin, generally being issued by its side. 
This explains the great variety of English gold coins like 
nobles, angels, rials, unites, laurels, crowns, and guineas. The 
guinea, so-called because coined from gold brought from 



§" 199] Seigniorage and Debasement. 485 

Guinea by the African company, was first struck in 1663. In 
1696 its value was fixed at 22s., and in 171 7 at 21s., at which 
figure it still serves to-day as a money- of- account. The actual 
gold coin is the sovereign, of 20s., first coined in 1485, which 
became the standard in 1816. It is popularly called the 
pound sterling, both words being survivals. For the weight 
to-day is 123.27 grains instead of a pound, and the sterling 
fineness is no longer 925 thousandths (as employed by the 
*' Easterlings " or German and Scandinavian traders), but 
916.6 thousandths or eleven-twelfths. 

(<r) Debasement by lowering the standard of the metal was 
also frequent in England, especially in the time of Henry VIII 
and Edward VI. In the latter's reign the standard of silver, 
originally 1 1 oz. 2 dwt. fine out of 1 2 oz., was only 3 oz. fine 
to 9 oz. alloy. The old standard was, however, restored by 
Elizabeth, and not thereafter tampered with. 

Perhaps the most glaring instances of all these methods of 
debasement are found in mediaeval France, where the situa- 
tion was further complicated by the fact that the feudal lords 
disputed with the king the right of coinage. The classic ex- 
ample is that of Philippe le Bel, who figures in Dante's poem 
as the typical false moneyer. In the last nineteen years of his 
reign there were twenty-two changes in the coins, sometimes 
several a year, with resulting variations of over three hundred 
per cent in the value of the money unit. 

The purposes of debasement have been, first, the discredit- 
able one of securing for the king a revenue arising out of the 
discrepancy between nominal and actual values, and secondly, 
the entirely creditable, but often mistaken, belief that a change 
in the weight or fineness of the coin would effectually prevent 
its exportation. In the United States,^ as in most modern 
countries, the few examples of debasement are of this second 
character. This brings up what is known as Gresham's law. 

^ The only example of a debasement is the reduction in weight of 
the gold coins in 1834, as explained in § 203. 



486 Money, Practical Problems. [§ 200 



200. Gresham's Law. 

When different grades of an article can be secured for the 
same price, individuals use the better one; when different 
grades of money are in existence, they use the poorer one. 
If rancid butter is put on the market in competition with 
good butter at the same price, no one will take it ; if poor 
money is found in circulation with good money, it will drive 
the other out. The unfit butter is eliminated ; the unfit money 
survives. In the first case the individuals act as buyers, in the 
second as sellers. The use of money is not its consumption, 
but its ahenation in order to secure things that can be consumed. 
Hence, so long as the poor money has legal tender equally with 
the good, individuals can make profits by melting or exporting 
the latter and paying out the former. This principle is known 
as Gresham's law. 

The name Gresham's law is due to the fact that a Scotch 
writer, McLeod, who was not familiar with the history of eco- 
nomic thought, happened half a century ago to find the idea in 
a report to Elizabeth by Sir Thomas Gresham. In reality, it 
is expressed more fully and forcibly by many of the earher 
mediaeval writers, not to speak of those of classic antiquity. 

It applies primarily to underweight or debased coin which 
will drive out the full-weight or good coin of the same metal. 
This will happen, however, only under two conditions. First, 
the total amount of money, good and bad, must be in excess 
of the country's needs. Only then will general prices rise to 
such an extent as to make the gold, for instance, more valu- 
able abroad than at home, thus leading to an increase of 
imports which must be met by an export of gold. The 
full- weight coins will then naturally be culled out, because the 
foreign debt must be paid in the equivalent of fine gold, while 
domestic debts can be liquidated in the light-weight legal- 
tender coins. In the second place, if a new issue of debased 
coin is made, and if the public is aware of that fact, it may 



§ 2oo] Gresham's Law. 487 

lose confidence, may refuse to utilize the new issue, and may 
resort to foreign coins or revert to barter. A debased coin- 
age which does not act as a medium of exchange has no effect 
on prices or on the good coin. Gresham's law operates only 
when both good and poor coins are actually used as money. A 
better statement of Gresham's law would therefore be that 
whenever a coin is worth appreciably more as bullion than as 
money it will disappear from circulation. 

Gresham's law applies, secondly, to paper money as con- 
trasted with metallic money. Here, however, as before, not 
only must the paper be issued to excess before it drives out 
the coin, but public opinion may entirely prevent the circula- 
tion of the paper money, as was the case with the greenbacks 
on the Pacific slope during the civil war. 

Gresham's law applies in the third place practically also to 
coin of one metal whose bullion value is less than that of coin 
of another metal, provided that both metals are legal standard 
money, with free coinage. The fine contents of the silver 
dollar, for instance, are 371:^ and of the gold dollar 23.22 
grains, making the ratio of silver to gold 15.998 (or, for short, 
16) to I. If now, without any change in the market condi- 
tions, the government were to increase the pure contents of 
the gold dollar to 24I grains while retaining the free coinage 
of both metals as standard money, the legal ratio would be 15 
to I ; that is, 24J grains of gold would exchange at the mint 
for, and would buy in the shape of a dollar, 15 times as much, 
or 371:^ grains, silver. In other words, more gold would now 
be needed to buy the same quantity of silver, or the same quan- 
tity of gold would buy less silver, i. e., 15 instead of 16 times 
as much. Hence silver would be overvalued or gold under- 
valued at the mint, the mint ratio (15 to i) being lower than 
the market ratio (16 to i). As a consequence, people would 
take to the mint 371:^ grains of silver, have it coined into a 
dollar, and exchange it for a gold dollar of 24J grains. They 
would then melt down the gold dollar, buy a dollar's worth of 



488 Money, Practical Problems. [§ 201 

silver in the market witli 23.22 grains of gold (16 to i), and 
put the difference in their pockets, repeating the process in- 
definitely. The gold, as the undervalued metal, would be 
melted or exported ; the silver, as the overvalued metal, would 
stay. For the people at large the gold dollar would be the 
good coin, because by melting or exporting it they could 
make a profit, and the silver dollar would be the poor coin. 
The poor, cheap money, overvalued at the mint, would 
stay; the good, dear money, undervalued at the mint, 
would go. 

Precisely the same result would ensue if gold were allowed 
to remain at the original figure, 23.22 grains, and the fine con- 
tent of the silver dollar decreased to 348.31 grains. For in 
this case also the legal ratio (348.31-^23.22) would be 15 
to I. Finally, the discrepancy might occur through a change 
in the market, rather than in the mint, ratio. Instead of the 
mint ratio being reduced to 15 to i, the market ratio might 
rise to 17 to I. In that case, also, the gold would go. 

On the other hand, if with an unchanged market ratio the 
legal ratio were altered to 17 to i (by government either reduc- 
ing the weight of the gold coin or increasing that of the silver 
coin), or if the market ratio fell to 15 to i, the mint ratio re- 
maining unchanged, the gold would become the poor, cheap 
money, overvalued at the mint, and would stay, w^ile the 
silver would become the good, dear money, undervalued at the 
mint, and would go. In every case, whenever there is a double 
standard with free coinage of both metals, a discrepancy be- 
tween the mint and the market ratio makes one of the two 
metals the poorer money, and leads to a gradual disappearance 
of the better money. 

201. Production of the Precious Metals. 

The value of gold and silver, whether as commodities or as 
money, is, as we know, closely related to the cost of produc- 
tion. The chief factors that affect the supply, and therefore 



§ 2oi] Production of Precious Metals. 489 

the cost, are the existence or discovery of new stocks, and im- 
provements in methods of extraction. 

The ascertainment of new sources of supply is largely a 
matter of chance. To speak only of modern times, there have 
been four such fundamental changes : the opening of the Potosi 
mines in the sixteenth century, the discovery of gold in Cali- 
fornia and Australia around 1850, the development of the 
Comstock lode in Nevada in the early seventies, and the great 
increase of the output of gold in Africa and the Klondike at the 
close of the century. In the methods of operation also there 
have been great changes. At first the simple methods were 
those of collecting the metallic dust in the streams by means 
of " placers " to wash the sand, or of taking the nuggets from 
the surface of the mines. Gradually better tools were evolved, 
and the methods of smelting perfected, rendering possible 
deeper mines and the separation of gold and silver from each 
other and from the inferior metals. Then came the hydraulic 
mining, where, as in Western America, whole auriferous moun- 
tain sides were washed away ; the cyanide process, which ef- 
fected the liberation of gold from the iron pyrite usually found 
in the deeper levels ; and the substitution of dredging machin- 
ery for hand labor in the old alluvial deposits. More recently 
still, the metallurgical art has been so perfected that over three- 
quarters of the silver now produced is a by-product of lead, 
copper, and zinc. 

While these changes in the conditions of supply have greatly 
increased the output of gold and silver, and their relative 
values, it must not be overlooked that the supply itself is 
affected by the value. If gold, for instance, should become 
relatively scarce, and rise in value, all the commodities, in- 
cluding the wages of hired labor, for which the miner ex- 
changes his gold, would fall in price, and the resulting increase 
of profits would lead him to use lower-grade ore and to in- 
crease the output. Per contra, a great increase and cheapen- 
ing of output means a fall in the value of gold or a rise in the 



490 Money, Practical Problems. [§ 201 

general price level, and this increased cost or lower profits 
will lead the miner to restrict his operations to the better- 
grade, and hence the less abundant, ore. Thus in the case of 
the metal used as the money standard, a relative abundance 
or dearth tends to correct itself automatically, rendering im- 
probable any continuous and permanent increase or decrease 
in the value of money. Within these broad limits, however, 
there is still ample room, as we have seen, for oscillations in 
the price level. 

The conditions of supply throughout most of recorded his- 
tory have been such as to make gold far more valuable than 
silver. We are told, indeed, that in early times in Arabia silver 
was worth more than gold, and we know that when Japan was 
opened to the Western world gold was worth only four times 
as much as silver. In classic antiquity the value of gold was 
far higher. At one time in Rome the ratio was as high as 1 7 
to I. The discovery of the gold mines in Noricum about 
150 B. c. changed the ratio to 9 to i, and in the early empire it 
was about 11 to i. In the early middle ages the ratio hovered 
about 10 to I . The discovery of America altered it to 1 5 to i ; 
and the revolutionary changes in the last quarter of the nine- 
teenth century have resulted in the present ratio of about 30 
to I. 

The table on page 491 will show the changes in production 
since the discovery of America, arranged by periods of twenty 
years to 1800, then by decades to the gold discoveries in the 
middle of the century, and by five-year periods thereafter. 

In the charts opposite pages 490 and 491 the same facts in 
somewhat greater detail are shown for the more important 
periods of the nineteenth century, not alone for the world in 
general, but for the United States in particular. In the table 
on page 492 will be found the salient figures illustrating the 
gradual decline in the price of silver from 1873 to 1892, the 
sudden fall during the next two years, and the fluctuations 
thereafter. The reasons for this will be explained later. 



PRODUCTION OF SILVER IN THE PRINCIPAL COUNTRIES OF THE WORLD 

FROM 1875 TO 1907; IN TROY OUNCES. 
1875 1880 1S85 1890 1895 1900 1905 1907 



1.20 
1.00 
0.80 
0.60 
0.40 
0.20 
















































~ 


1 


























































69,000,000 


























































OUNCES 

1 1 1 






A 










































\ 


















— 


/ 

r 


_\ 


4- 


— 


































1 


\ 








60 


000,000 




































1 










s. 






V 


^. 


/ 








\ 


/ 
































/I 


■0 












/ 




'"~ 






^, 


/ 


V 


-^ 


v- 






























/f^ 












/ 
















































/ 












V 




/ 














































^ 


^<^^ 










J 


r 




45,000 


,000 








































/^ 










/ 


















































y 












// 












































y 


/* 
















i0. 




























\ 


K 




V 


r^-^ 


'^-i 


^ 


*-^ 


** 


<* 














/ 


































\Z- 


/ 


V 


^ 


PR 


ICE PER o1 


V 








'^'i 


Sc^ 












30,000.000 
















7 




















''\ 


V 


^^ 


y. 


^\ 


^f^\ 
































/ 


















^' 


^ 




•^ 


N 


K> 




^^ 


\ 








































— ( 


— c 


<»• 






















i 


































, 


/' 


























<^0 


•X 


.• 


<•• 


f • 








*y 








>-ri 


" 
































i^'-" 


/ 


15,000 


ooc 


*-^ 


< 






N 


++ 


> 




,* 
































A 


t'\ 




T^ 


_ 


JV 


— - 






*. 


y 






, 


•• 


•., 


•~ 
















} 


\ 







^ 


r^^ 






^'\ 


y 










'\ 





... 


_ 


\ 




\' 


• 




o'' 


c° 














^ 




Aj 




G^ 


?■' 




_,. 


/» 






















\ 


*•, 




— 


\r;f 


^o" 




, 


^ 


— 


— 


' 










«0 


uj 


Ml 


•'" 






























—" 


T' 


' — 


y 


_ 


_ 


_ 


_ 

























































PRODUCTION OF GOLD AND SILVER IN THE UNITED STATES 
FROM 1845 TO 1907. 



MILLIONS 
DOLLARS 

100,000,000 
90,000,000 
80,000,000 
70.000,000 




~ 




_ 


~ 


~ 


~ 


~ 


~ 


"~ 




















— 


— 


— 


— 










1 — 


— 


1 — 


1 — 


] — 


\ — 
















I — 


j — j — 


1 — 


1 — 


1 — 




r~ 








r— 


[ — 


p- 


r- 


^ 


p- 


r— 






[— T— 1 










































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































^ 












































































































































































































































































































































































; 












































































































































































































































































- 




^ 


^ 


- 


- 


i- 


^ 


- 


A 




















- 


L 


- 


- 




- 






-H 


- 


- 


- 


- 


- 
















- 


- 


- 


^ 


- 


i 


^ 


- 








J 


- 


- 


- 


-1 


- 


_ 






-- 






E 




= 


: 


/ 


i 






^ 






K 


: 




^ 


E 


E 






I 


L 


: 


- 










= 


= 


E 


E 


= 


E 














z 


: 


: 


: 


7 


t 






K 


-/ 


t 




/ 


; 


^ 


V 


i 


; 


^ 






!E 


50,000,000 
40,000,000 


_ 


: 




% 


- 


~ 


~ 


z 


z 










^ 


\ 






"i 


^ 


I 


z 


^ 


E 


^ 


K 




E 


z 


- 


: 


= 


A 


E 












q 




z 


I 


H 




- 


~ 


- 


3 


/ 


\ 




: 


E 


L 

; 


: 


; 


z 


z 






t= 




-1 














































































































































































































































E 


z 


- 


2- 


: 






'z 


: 


E 










E 


- 










z 


E 


E 


E 


^ 




h 


-. 


? 


\ 


^ 


1 


\ 


^ 

^ 


^ 




p 




\ 








^ 


i 


= 


i 


i 


i 


1 


^ 




!; 


i 


; 


» 


5 


E 


E 


E 






21 


20,000,000 
10,000,000 


z 


z 


"9 


; 


= 


: 


: 


E 


E 




















- 


E 


E 


E 


E 




z 


1 
-J 


% 


\ 


I 




A 


E 












r 


F 


E 


E 


E 


E 


E 


z 




E 








E 


E 


E 


E 


E 


: 


E 






EE 




I 


1 
















































f 








































- 
































: 


E 


E 




z 


z 


z 




















r_ 


oi 


^^ 


L^ 


"1 


2 

■7 


S 


i 




I 


z 


z 


: 


z 


z 
















F 


E 


E 


E 


z 






z 








I 


z 


z 


z 


E 


L 


E 






EE 






?- 


E 


If 


R: 


Id 


m 


^ 


'o 







^ 




V 


§ 


^ 




s^:^^ 


L 


- 


I 


z 


z 


E 


E 


E 


















z 


z 


z 


E 


E 




z 








p 


z 


z 


z 


z 


z 


z 






zz 




1840 
1847 
1848 
1840 
1850 
1851 
1852 
1853 
1854 
1855 
1850 
1857 
1868 
1850 
1800 
1801 
1852 
1803 
1801 
1805 
1801'. 
1807 
1808 
1800 
1870 
1871 
1872 
1873 
1874 
1875 
1870 
1877 
1878 
1870 
18811 
1881 
1882 
1883 
1884 
1886 


1 


i 


\ 


i 


1 


2 


» 


s 


2^ 


3 


2^ 


y 


?l= 


! 


!l 


i 


1 


\ 


% 



PRODUCTION OF GOLD IN THE PRINCIPAL COUNTRIES OF THE WORLD 
FROM 1875 TO 1907; VALUES IN UNITED STATES CURRENCY. 



1885 1890 



1895 



1900 



1905 1907 























$ibo,6oo,ooo 




































/ 
































































/ 
































































/ 

1- 




















































































$1 '^K-. 




000 


























































" 






































































































' 
































































/ 
































































/ 
























i(?i 






nnn 


































/ 
































































1 
































































1 






























































































































1 




























05; 


)00 


OOO 
































1 


























ill 
































1 




























































'' 




1 
































































/o 






























































;^ 


s 




























































is! 


/ 


\ 






















% 


90, 
































e 


• . 


!^, 


/ 


























































• 




/ 




























































• 


i 


/ 


• 
























































A 


\ 


^ 




















1 


































\J 


• / 


• 




\ 


/^ 


























1 


























' 


/ 


• 




\ 


id 




















































/ 


i 








o'a 






















































'/ 


1 








'•i 




















































'> 


f 








i 






























60; 


wo 




















^ 


■c 








1 






























\ 


















A*^ 








-' 


^ 


















































/ °* "^ 








'^ 
















































/ 


—k^ 










J'' 


T 












/ 


I 


































/ 


ik' 










; 












> 


r 


\ 
















45,- 


)00, 


000 












/ 


'^ 


f 












1 












/ 




\ 


























/ 


. 1 


^ 












; 










/ 


f 




^ 






























V 


^/ 
















1 










/ 








\ 




























/^/ 
















j 












1 










•^ 


k. 








/ 


\ 












/ 


•/ 
















/ 












. 












^V 


? 


% 











opf 






..• 




/c 




, 












/ 












• 




^ 


• 


.A. 


• 


• 






•* 






t^ 


x' 




\ 










/ 














1 








\ 
















y 


^„i^ 






\ 

^ 








o 


( 










. 





f 












\ 


< 


<^x 






,' 






'"/ 


^<^ 








\ 


/ 






-J 


._°. 


.•^ 




■*'•« 


'*, 


/ 
















\ 


V^ 


■3 




^" 


"^ 








/ 












o 




/ 




° 








*♦ 






















I 










(^ 


















/ 








o 


X 
































A 














o 


<? 

T 




/ 








X 


°o 
































/ 


^'% 














o^'K.-" 


tj' 


f* 


+■ 


-+ 


«* 






°o 






























-i 














L« 




.> 


-> 








































/ 


m 


>^ 










+■ 


1^;^ 










































_^/ 


^- 1'^ 




•+j! 


*. 


h#- 


£ 


.° 


' 












^ 











§ 2oi] Production of Precious Metals. 491 



PRODUCTION OF GOLD AND SILVER SINCE THE DISCOVERY 
OF AMERICA, ooo OMITTED. 





Gold. 


Silver. 


2"o 




Total for Period. 


Average 


Total for Period. 


Annual 










Annual 
Value in 
Dollars. 






Average 


"o rt Oh 




Fine 
Ounces. 


Value in 
Dollars. 


Fine 
Ounces. 


Coining 
Value in 
Dollars. 


Coining 
Value in 
Dollars. 




I493-I520 


5,221 


^107,931 


)?3,855 


42,309 


$54,703 


?«,954 




I52I-I540 


5-525 


114,205 


4,759 


69,598 


89,986 


3.740 






I54I-I560 


4,378 


90,492 


5,656 


160,287 


207,240 


12,952 






I56I-I5S0 


4,398 


90,917 


4,546 


192,578 


248,990 


12,450 






I58I-I600 


4,745 


98,095 


4,905 


269,353 


348,254 


i7,4>3 






I60I-I620 


5,478 


113,248 


5,662 


271,925 


351,579 


17,579 






I62I-I640 


5,337 


110,324 


5,516 


253,085 


327,221 


16,361 






I64I-1660 


5,639 


116,571 


5,828 


235-531 


304,525 


15,226 






I66I-I680 


5-954 


123,084 


6,154 


216,691 


280,166 


14,008 






168I-I700 


6,922 


143,088 


7,154 


219,842 


284,240 


14,212 


I4.S1 


I70I-I720 


8,243 


170,403 


8,520 


228,651 


295,629 


14,781 


15.04 


I72I-I740 


12,268 


253,611 


12,681 


277,262 


358,480 


17,924 


14.94 


I74I-I760 


15,824 


327,116 


16,356 


342,812 


443,232 


22,162 


14.14 


1 76 1-1780 


13,313 


275,211 


13,761 


419,712 


542,658 


27,133 


14.72 


I78I-IS0O 


11,439 


236,464 


11,823 


565,236 


730,810 


36,540 


15.68 


I801-I8IO 


5-716 


118,152 


11,815 


287,469 


371,677 


37,168 


15-77 


I8II-I820 


3,680 


76,063 


7,606 


173.857 


224,786 


22,479 


15.62 


1S2I-I830 


4,570 


94,479 


9,448 


148,070 


191,444 


19,144 


15.82 


I83I-I840 


6,523 


134,841 


13,484 


19', 759 


247,930 


24,793 


15.62 


I84I-I850 


17,605 


363,928 


36,393 


250,903 


324,400 


32,440 


15.70 


1851-1855 


32,051 


662,566 


132,513 


142,443 


184,169 


36,824 


15-38 


I856-IS60 


32,431 


670,415 


134,083 


145,477 


188,092 


37,618 


15.29 


IS6I-I865 


29,748 


614,944 


122,989 


177,010 


228,861 


45,772 


1544 


1866-1870 


31,350 


648,071 


129,614 


215,258 


278,313 


55,663 


15-57 


I87I-I875 


27,955 


577,883 


115,577 


316,585 


409,322 


81,864 


16.64 


1876-IS80 


27,715 


572,931 


114,586 


393878 


509,256 


101,851 


18.05 


1881-1885 


23,974 


495,582 


99,116 


460,020 


594,773 


118,955 


19.41 


I8S6-I890 


27,306 


564,474 


112,895 


544,557 


704,074 


140,815 


19-75 


I89I-1895 


39,413 


814,786 


162,947 


787,907 


1,018,708 


203,742 


31.60 


I 896-1 900 


62,235 


1,286,505 


257,301 


828,467 


1,071,148 


214,230 


33-33 


I90I-I905 


77,890 


1,610,310 


322,061 


825,140 


1,066,848 


213,370 


33-87 


1906 


19,445 


401,973 


401,973 


165,382 


213,828 


213,828 


30-54 


1907 


1 9, 8" 60 


410,555 


410,555 


185,014 


239,211 


239,211 


31.24 



492 Money, Practical Problems. [§ 201 



THE FALL IN THE VALUE OF SILVER SINCE 1873.1 



Year ending 
June 30. 


London Price per 

oz. of Bar Silver, 

British Standard 

(.925.) 


Equivalent Price 

in Dollars peroz. 

of line Silver. 


Bullion Value of 
Silver Dollar. 


Market Ratio 

of Silver to 

Gold. 


1872 


6oi\d. 


$1322 


$1,022 


15^63 


1873 


59T|d- 


1.298 


1.004 


15^93 


1874 


58Ad. 


1.278 


.989 


16.16 


1875 


S6iid. 


1.242 


.961 


16.64 


1876 


53?^:, 


1. 164 


.900 


17^75 


1877 


54iici. 


1.202 


•930 


17.20 


1878 


S^fd. 


1.154 


.892 


17-92 


1879 


Slid. 


1. 124 


.869 


18.39 


1880 


52id. 


1. 145 


.886 


18.05 


1881 


Slid. 


1-132 


.876 


18.25 


1882 


5ii|d- 


1. 136 


.878 


18.20 


1883 


:)'-'i6 


1. 109 


.858 


T8.64 


1884 


I. Ill 


■859 


18.61 


1885 


48A 


1.065 


.824 


19.41 


1886 


45f 
44H 


•995 


.769 


20.78 


1887 


•979 


•7S8 


21.10 


1888 


42I 


.940 


.727 


22.50 


1889 


42H 


•935 


•723 


22.10 


1890 


47f 


1.046 


.809 - 


19-75 


1891 


45A 


.988 


.764 


20.92 


1892 


39l 


.871 


.674 


23.72 


1893 


28H 

29lf 

3016 


.780 


.604 


26.49 


1894 


•63s 


.491 


3256 


189s 


.654 


.506 


31.60 


1896 


.676 


•523 


3059 


1897 


27r6 


.604 


.467 


3420 


1898 


26H 


•590 


•456 


35-03 


1899 


27T6 


.602 


.465 


34^36 


1900 


28A 


.620 


.480 


33-33 


1901 


27t\ 


•596 


.461 


34.68 


1902 


24A 


.528 


.408 


39^1 5 


1903 


24| 

26|f 


•543 


.420 


38.10 


1904 


•579 


.448 


35.70 


1905 


27it 

30I 


.610 


.472 


33.87 


1906 


.677 


•523 


30.54 


1907 


30A 


.661 


.512 


31-24 



1 Arranged from Report of the Director of the Mint, 1908, p. 115, and 
ditto from Report upon the Productioti of the Precious Metals during igoj, 
1908, pp. 122-3. 



§ 202] Choice of Money Standard. 493 



Finally it may be of interest to append herewith a table show- 
ing the various countries which furnish at present the world's 
supply of gold and silver. 

WORLD'S PRODUCTION OF GOLD AND SILVER IN 1907. 







Silver. 




Gold. 








Coining Value. 


Commercial Value. 


United States . . 


$9o>435.7oo 


$73,069,500 


$37,299,700 


Mexico . . 






18,681,100 


79,059,000 


40,357.200 


Canada . 








8,383>5oo 


16,523,400 


8,434.700 


Africa . . 








151.699,500 


1,022,000 


521,700 


Australia . 








75>677,7oo 


24,673,000 


12,594,800 


Russia . . 








26,684,100 


170,800 


87,200 


Germany 








66,600 


6,578,500 


3.358,100 


India . . 








10,383,600 


- 


. - 


Peru . . 








514,500 


12,368,300 


6,313,600 


Bolivia 








442,400 


6,752,100 


3,446,800 


Other countries 




27,586,600 


18,994,200 


11,695,900 










$410,555-300 


$239,210,800 


$122,109,700 



202. The Choice of the Money Standard. 
Standard. 



The Alternative 



In view of the changing relations of gold and silver the 
problem as to whether both, or only one, and if so which one, 
should be used as the money standard was until very recently 
a subject of serious discussion. The problem has now been 
solved by the adoption, wellnigh throughout the entire world, 
of the gold standard as opposed either to the silver standard 
or to the conjoint use of both metals under the name of bimet- 
allism.^ The history of the evolution of the gold standard may 

^ The word " bimetallism " was originated by M. Cernuschi in 1869. 
Before that, the term " double standard " was always used. Symmetal- 
lism, as a kind of bimetallism, proposes a single coin composed of the two 
metals. The coins of classical antiquity were sometimes made of elec- 
tron, or a combination of gold and silver. 



494 Money, Practical Problems. [§ 202 

be divided into several periods : (i) the alternating standards 
up to i8i6 ; (2) the embarrassments of bimetallism to 187 1-3 ; 
(3) the struggle for silver to 1900; (4) the final disappear- 
ance of the silver standard since 1900. In this section we 
shall deal with the period of alternating standards. 

In the early middle ages the currency was composed almost 
entirely of copper and silver. It was not until the fourteenth 
century that the needs of a growing commerce led to the intro- 
duction of gold coins in the trade centres, first of Italy and 
then of other countries. During the next two centuries there 
was no marked increase in the supply of the precious metals, 
so that with the expansion of trade the value of money rose, or 
general prices fell. The supply of silver, however, increased 
still more slowly than that of gold, and as a consequence the 
market ratio diminished, falling, for instance, in France from 1 2 
to I in 1360 to 9 to I in 1425. As both gold and silver coins 
of definite weight and fineness circulated, each country practi- 
cally had its own legal ratio, which almost invariably differed 
from that of the others. In some cases the discrepancy was 
very marked, the mint ratio in the same year, for instance, 
being 9.8 to i in Spain and 11. 15 to i in England. As a re- 
sult the ratio was constantly changed by each government by 
successive recoinages, now of gold, now of silver, in order 
to keep the coins in the country, the confusion being height- 
ened by the debasements designed to secure a profit for the 
sovereign. 

No one but a few keen business men, primarily Italians, 
Southern Frenchmen and Jews, who took advantage of these 
discrepancies, comprehended the true reason of the alternating 
outflow or inflow of the precious metals or understood the dif- 
ference between coin and bullion value. What is to-day deemed 
a perfectly legitimate business — that of exporting gold or 
silver — was then considered a heinous offence. But neither 
an adverse public opinion nor drastic legal prohibitions were 
of avail in preventing the disappearance now of gold, now of 



§ 202] Choice of Money Standard. 495 

silver. The period, in short, was one of unconscious bimetal- 
lism, with virtually an alternating standard in actual circulation. 

In the sixteenth century came the discovery of the American 
silver mines and the " revolution of prices," which was consum- 
mated by 1660, when the market ratio had risen to 15 to i, a 
fall of about 50 per cent in the value of silver. For the next 
two centuries the relative output of the precious metals did not 
alter materially, and the changes in the market ratio were only 
slight i^cf. table on p. 491). The mint ratios in the various 
countries had accommodated themselves somewhat more 
closely to the market ratio, but recoinages and oscillations 
were not infrequent. It happened that during the greater part 
of the eighteenth century the mint ratio in France and most of 
the continental countries was in favor of silver, while in Eng- 
land it chanced to be in favor of gold. As a consequence the 
actual currency at the close of the century was gold in England, 
but silver in France. This largely accidental situation had im- 
portant consequences. 

In France the mint ratio of the silver ecus to the gold loins 
was in 1726 14I to i, which resulted practically in a silver 
currency. Although the ratio was again changed in 1 785 to 
15^ to I, this did not so materially differ from the market ratio 
as to expel much silver. The old ratio was continued by the 
law of 1803, which adopted the decimal system, made the 
silver franc of five grammes the unit, and provided for 20 and 
40 franc gold pieces. In England, on the other hand, the 
guinea, which had become since 1663 the chief gold coin, was 
intended to pass at 20 shillings, but was actually current at a 
higher figure. The recoinage of 1696-8 was designed to fur- 
nish a better silver currency, but the value of 22 shillings as- 
signed to the guinea caused the silver to disappear. After 
constant changes — the government abandoning for a time the 
free coinage now of gold, now of silver, now raising and now 
lowering the maximum value of the guinea — its value was 
definitely fixed in 171 7 at 21 shillings, equivalent to a ratio of 



496 Money, Practical Problems. [§ 203 

15.21 to I. As the market ratio was under 15 to i, this re- 
duction of the guinea was insufficient, and silver continued to 
disappear, only the poor and worn pieces remaining. Gold 
practically became the standard. From 1760 to 1773, how- 
ever, the market ratio changed from 14I to 15^ to i, overtak- 
ing the mint ratio, so that gold began to be exported, only the 
poor coins remaining. This led to the gold recoinage of 1774, 
when silver was declared to be legal tender in sums over ^2^ 
only by weight. Although this provision expired in 1783, it 
was renewed in 1798, when the free coinage of silver was also 
suspended. Thus by the end of the century silver had become 
subsidiary money, and England was really on a gold basis. It 
was, however, not until 1816 that the gold standard was defi- 
nitely adopted, silver being frankly made token money by be- 
coming legal tender only up to 40 shillings, and by being 
henceforth coined only on government account. A pound of 
silver |^ fine is since then cut into 66 shillings, but issued to 
the public at 62 shillings; while any one is entitled to receive 
for an ounce of standard gold \^ fine ;^3 17^-. 10^^., or in 
cash from the Bank of England (because of delay in coinage) 
£3 17-f- 9^- 

203. The Embarrassments of Bimetallism. 

In the other countries the problem was yet to be solved. 
In the United States, Hamilton, in following the custom of 
the time, had recommended the use of both metals, but 
thought that the French ratio was too high. Accordingly the 
fine contents of the coins were so chosen as to correspond to a 
ratio of 15 to i (3714- grains silver and 24I grains gold to the 
dollar). The market ratio, which had been a little less than 
that in 1790, rose to a little more after 1794, but the dis- 
crepancy was not serious for the next two decades, especially 
as many foreign coins were current. After 1820, however, the 
market ratio varied from 15.6 to 15.8 to i, and gold as the 
undervalued metal began to leave the country in large quan- 



§ 203] Embarrassments of Bimetallism. 497 

titles. To remedy this state of affairs, and partly because of 
the supposed gold discoveries in the South, the eagle was in 
1834 reduced to 258 grains standard and 232 grains fine, 
making the ratio 16.002 to i ; while in 1837, the standard 
weight remaining the same, the fineness was made to conform 
to that of silver (fo), with a resulting fine content of 232.2 
grains or a ratio of 15.998 to i. This virtual ratio of 16 to i 
caused gold now to be the overvalued metal, and silver was 
gradually exported. The transition was especially marked in 
the later forties until, in order to keep the small silver in the 
country, the weight of all the subsidiary coins was reduced in 
1853. Practically, thus, the country had come to be on a gold 
basis. The question, however, now aroused no interest, because 
the actual currency consisted of state bank notes until the civil 
war, and of greenbacks and national bank notes thereafter. 

In France, where up to 1850 the mint ratio of 15^^ to i 
was slightly below the market ratio, gold as the undervalued 
metal gradually disappeared, leaving the country to all intents 
on a silver basis. From 1850 on, however, the market ratio 
fell below 15^ to i as the result of the gold discoveries. 
Gold as the overvalued metal began to be imported, and 
France was slowly being drained of its silver. The difficulty 
finally became so serious that France formed, in 1865, together 
with Belgium, Italy, and Switzerland, the Latin Union, to last 
for fifteen years. Greece joined in 1868, and at various later 
dates Spain, Roumania, Servia, and Bulgaria patterned their 
systems on that of the Union. This agreement, while not af- 
fecting the old silver five-franc pieces, reduced the fineness of 
the subsidiary silver coins from .900 to .835, and made them 
legal tender only to fifty francs between individuals and to one 
hundred francs in payments to the government, their coinage 
by the respective states being limited to six francs per capita. 
The coins circulated interchangeably and each state bound 
itself to redeem its own coins in gold or five-franc pieces for a 
period of two years beyond the termination of the Union. 

32 



498 Money, Practical Problems. [§ 204 

In the other countries the unrest grew. Portugal followed 
England in adopting the gold standard in 1854, and the first 
international monetary congress, held in Paris in 1867, pro- 
nounced itself in favor of the same scheme. United Ger- 
many also took advantage of the victory over France to adopt 
the gold standard in 1871-1873. The new silver mark was 
to be legal tender only to 20 marks (^5), although the old 
Vereinsthaler still remained legal tender. Free coinage of 
silver, however, was discontinued, and much of the old silver 
was thrown on the market to be sold. The Scandinavian 
monetary union also adopted the gold standard in 1873. 
These measures, coupled with the discovery of the Comstock 
lode, combined to depress the price of silver and to bring the 
difficulties of bimetallism to a head in the other countries. 

204. The Struggle for Silver. 

The Latin Union, which, as we have seen, was formed to 
prevent the loss of silver, was now, owing to the fall in that 
metal, flooded with silver under the free coinage provision and 
was threatened with a loss of its undervalued gold. During 
1874-1876 conferences were held, looking toward a limitation 
of the free coinage of the silver five-franc pieces. Belgium 
had already provisionally suspended free coinage in 1873, and 
France followed in 1876. Finally, in 1878 the Latin Union, 
which was extended to 1885, definitely abrogated the free 
coinage of the five-franc pieces. Thus was introduced the 
"limping" or "halting" standard, so called because silver 
now lost one of the two supports — legal tender and free coin- 
age — which are essential to real bimetallism. 

In 1885 the Union was renewed to continue until 1891, 
and from year to year thereafter. Free coinage was tech- 
nically permitted, but it was provided that any state adopt- 
ing this system could not circulate its silver coins in the 
other countries, and would be obligated to redeem in gold the 
five-franc pieces of the other countries. This meant, of 



§ 204] Struggle for Silver. 499 

course, that free coinage was practically impossible. More- 
over, if the union should be terminated at any time, each state 
was held to redeem its five-franc pieces circulating in any other 
country. Thus was added to the suspension of free coinage the 
principle of redemption of the silver currency in gold. Owing 
to the fact that France holds large quantities of silver coined by 
the other members of the Union, some of which would find great 
difficulty in redeeming their quota, the Union bids fair to con- 
tinue for a long period. To all intents, however, the Latin 
Union has been on a gold basis since 1878 because although 
the silver five-franc coins are still full legal tender, there is no 
free coinage, and the value of what is virtually a token money 
is kept at parity with that of the gold-standard money by a 
limitation of the quantity coined and by its acceptance at the 
treasury for public dues. In the minor silver coins there has 
been since 1865 neither free coinage nor legal tender. 

In the United States the agitation did not begin until the 
fall in the price of silver had become marked in 1875. With 
the impending resumption of specie payments, it had seemed 
desirable to revise the coinage laws, and the act of 1873 omit- 
ted the silver dollar from the list of American coins, largely 
because of the fact that for years no such dollars had been 
coined. The few outstanding dollars, however, retained their 
full legal tender quality until 1874, when the revised statutes, 
reenacting the subsidiary silver law of 1853, provided that " the 
silver coins" of the United States should be legal tender only 
to five dollars. Later on, when the silver movement had as- 
sumed important dimensions, the demonetization of silver was, 
although without any foundation, declared to have been the 
result of a conspiracy, and was characterized as the " Crime of 
1873." The American silver producers now thought that the 
fall in the price of silver could be arrested by an artificial in- 
crease of the demand. The results of the movement were the 
monetary commission of 1876 and the Bland-Allison act of 
1878. This directed the secretary of the treasury to purchase 



500 Money, Practical Problems. [§ 204 

monthly at the market price not less than two nor more than 
four million dollars' worth of silver bullion, and to coin it into 
the standard silver dollars, which were again made legal ten- 
der. For each dollar, so coined and kept in the treasury, silver 
certificates were to be issued. 

Neither this act nor the suspension in 1878 of the sales of 
the old Thaler by Germany served to arrest the fall in the price 
of silver. The second and third international monetary confer- 
ences of 1878 and 1 88 1, called for the purpose of "rehabili- 
tating " silver, failed to agree. The gold standard had been 
virtually adopted by the Netherlands in 1875-6, and in 1885 it 
was introduced into Egypt. In 1882 the discrimination shown 
by the national banks against the silver certificates was checked 
by the determination not to re-charter any bank which refused 
to receive them on a par with gold certificates. The Western 
farmers now began to ascribe the low price of wheat to the 
competition in the silver-standard countries, and demanded 
the remonetization of silver in the belief that this would in- 
crease prices. The union of the farmers with the mine owners 
led to a renewed agitation for free silver, the result being a 
compromise measure known as the Sherman law of 1890, This 
act abrogated the law of 1878 (under which a total of 
370 million silver dollars had been coined), and substituted 
the monthly purchase by the government of four and a half 
million ounces of silver, at the market price, to be paid for in 
new Treasury Notes, which were to be redeemable in gold or 
silver coin. After July i, 1891, the coinage of the silver dol- 
lars was to cease, except so far as it might be necessary to 
secure the outstanding treasury notes. The government also 
declared its intention to preserve the parity of the gold and 
silver coins. Thus the silver-coinage law was replaced by the 
silver-purchase law. 

In the course of a few years the gradual accumulation of 
silver drove out the gold and endangered the stability of the 
gold reserve. The fourth International Monetary Conference 



§ 204] Struggle for Silver. 501 

of 1893 proved, like its predecessors, of no avail, and when the 
government of India closed its mints to the free coinage of 
silver, a crisis ensued, and led in November, 1893, to the 
hasty repeal of the Sherman law, under which 168,674,- 
682.53 fine ounces had been purchased at a cost of $155, 931,- 
002.25. With this came to an end the government's effort to 
create an artificial market for silver as a stepping-stone to 
bimetallism. As a result of the Indian and American measures 
the price of silver now dropped enormously, the ratio jumping 
from 19I to I in 1890 to 32^ to i in 1894. 

From now to the end of the century came the acute struggle 
in the United States and the progressive adoption of the gold 
standard elsewhere. In 1892 it had been introduced into 
Austria, followed by Chile in 1895, Costa Rica in 1896, and 
Russia and Japan in 1897. In the same year Peru suspended 
the free coinage of silver, in 1898 Ecuador limited its legal 
tender, and in 1899 India adopted the gold standard. In the 
United States a fierce presidential campaign was waged in 
1896 for the complete remonetization of silver at the old 
ratio of 16 to i. The chief arguments of the silver advocates 
were that the fall of prices meant an appreciation of gold 
rather than a depreciation of silver, and that free coinage 
would raise prices by increasing the money supply ; that 
debtors had to work harder to repay debts contracted on a 
gold basis ; that the farmer was undersold by the producer of 
wheat in silver-using countries ; that the laborer as well as the 
employer suffered from the lack of money ; that silver was the 
poor man's money; that the "gold-bugs " of Wall Street were 
guilty of " Seven Financial Conspiracies," among them the 
cornering of the gold supply. The objection that the acts of 
1878 and 1890 had disclosed the futility of attempting artifi- 
cially to maintain the value of silver was sought to be met by 
the contention that the acts in question had not gone far enough. 
All of these arguments were obviously weak, except that as to 
the appreciation of gold, the advocates of the gold standard 



502 Money, Practical Problems. [§ 205 

making a mistake in claiming that the fall of prices had no 
connection with the gold supply. But the silver champions 
committed the far more egregious error of believing that the 
adoption of free coinage by any one country like the United 
States would suffice to remedy the situation. 

The defeat of the silver agitation was followed by the act of 
1900, which defined as the standard the gold dollar of 25.8 
grains, nine-tenths fine. It was provided that all forms of 
money issued or coined by the government should be main- 
tained at a parity with the standard, and that the United 
States notes (greenbacks) and treasury notes should be re- 
deemed in gold coin and not reissued except in exchange 
for gold ; and for such redemption purposes a reserve fund of 
150 millions of gold was created. Whenever the fund should 
fall below this figure the issue of gold certificates was to cease,^ 
and the secretary of the treasury was empowered to sell bonds 
to replenish it. Finally, the treasury notes of 1890 were to be 
cancelled and replaced by silver certificates as fast as the silver 
bullion bought under the Sherman act might be coined. Thus 
the United States placed itself in line with the other gold- 
standard nations. 

205. The Abandonment of the Silver Standard. 

The gold standard had now been adopted in the most im- 
portant countries. But there remained some of the American 
republics, the colonial possessions of the United States and a 
large part of Asia, still on the silver standard. In almost all 
of these countries the currency was composed exclusively of 
silver, and the situation had become wellnigh intolerable to 
merchants and others having foreign dealings, because of the 
so-called "dislocation of the exchanges," whereby purchasers 
of bills of exchange (see § 210 and § 228) were exposed to 
the continual fluctuations in the silver which they paid or re- 

1 In 1906 the limit was reduced so that the issue of gold certificates is 
to cease only when the fund falls below fifty millions. 



§ 205] Abandonment of Silver Standard. 503 

ceived for the bills. It was this consideration that led to the 
adoption of the gold standard by Ecuador in 1900, San Do- 
mingo in 1 90 1, and Colombia in 1903, the last taking effect in 
1906. In the more important states, however, it would have 
been entirely too costly either to melt down the old silver 
currency or to purchase enough gold to serve as a circulating 
medium. It was necessary to devise some method which 
would furnish the chief advantages of the gold standard and 
yet retain the circulation of silver. The first country to under- 
take this task was India. 

India was in a peculiarly embarrassing condition because the 
fall in the price of silver caused the government a constantly 
increasing loss in the large remittances (over ^^i 6,000,000 in 
1893), which it was obliged to make in gold to the mother 
country for interest on the debt and for its contribution to im- 
perial expenditures. The Indian standard was the rupee of 
165 grains fine silver, originally worth about two shillings, but 
which had fallen by 1893 to about 14^/. As the probable re- 
peal of the Sherman law threatened a still greater decline of 
silver, the Indian government endeavored to prevent a further 
fall in the rupee. The ordinary mode of making remittances 
to England was by the India Government Council in London 
selling to merchants who had bought goods in India bills of ex- 
change, known as Council Bills, and payable in rupees in India 
by the government. The Indian government now in 1893 
suspended the free coinage of silver, and declared that it would 
sell bills of exchange in London, or mint rupees in India in ex- 
change for gold, at the rate of 15 rupees to a pound, or xdd. 
for a rupee — equivalent to a ratio of about 22 to i. Although 
gold was not legal tender, the government agreed to accept it 
in payment of public dues. The object of these measures was 
to limit the coinage, and hence the quantity, of the rupees in 
the hope that their value would, in the face of an increasing 
demand, gradually rise to the desired par. As a matter of fact 
the gold price of the rupee fell for a time even below \^d. 



504 Money, Practical Problems. [§ 205 

The reason for this, however, was twofold : first because, as 
the closing of the mint in India and the repeal of the silver 
purchase law in the United States caused the price of silver to 
fall, it became profitable for the Indians to take the rupees, 
which were now worth more as coin than as bullion, out of 
their hoards and to put them into circulation, thus increasing 
the supply ; and secondly, because gold was fast rising in value, 
as reflected in the fall of general prices in Europe. The rupee 
fell in gold price, because there were more rupees and a defi- 
ciency of gold in the world market, and the general price level 
in India rose as the rupee fell in value. But the rise of 
(silver) prices in India was less than the fall of (gold) prices 
in Europe and, had it not been for the cessation of free coin- 
age, the gold price of the rupee would have fallen still more. 

After two or three years, however, the stationary currency in 
the face of growing population and business meant a relative 
contraction, and the gold price of the rupee gradually rose 
until, by 1898, it reached, and even shghtly exceeded, the de- 
sired par of i6d. As a consequence, gold now began to flow 
into India, because there was a profit in tendering it to the 
government for silver. This permitted the government to 
accumulate a reserve of gold, and in 1899 India decided to 
adopt the gold standard, declaring gold coins to be legal 
tender at the rate of 15 rupees for a sovereign. In India, 
therefore, the rupees, which form the great mass of the circula- 
tion, still have unlimited legal tender, but are virtually a token 
currency, because there is no free coinage. Gold, but not 
silver, can be tendered at the reserve ; and while the Indian 
government will take gold in exchange for rupees, it is under 
no obligation to pay out gold. As long, however, as the free 
coinage of silver is suspended, the government is always able 
to maintain the value of the rupees by coining only as many as 
are necessary, procuring the silver for this purpose by selling 
gold. Thus the gold standard is automatically preserved, 
although the currency is composed of token silver. 



§ 205] Abandonment of Silver Standard. 505 

The same principle, although in a slightly different form, was 
adopted in the Philippines in 1903, under what has become 
known as the gold-exchange standard. The unit of value was 
made the gold peso of 12/^ grains, -j^^ fine, two of them pass- 
ing for an American dollar. But the actual coins were the new 
silver pesos of 416 grains, ^ fine (with minor coins of corre- 
sponding weight) . The pesos, in lieu of which silver certifi- 
cates may be emitted, are legal tender for all debts unless 
otherwise specifically provided by contract, but can be coined 
only on government account. In order to keep the silver coins 
at a parity with gold, the government maintains, in both the 
Philippines and New York, a gold fund against which bills of 
exchange are sold at a fixed rate whenever there is a demand 
for gold for making payments abroad. If there is a danger of 
a scarcity of money, the government can put more pesos into 
circulation ; and if there is an imminent excess of silver, with 
a resultant rise of prices which would normally mean an export 
of coin, the government stands ready to sell drafts upon its 
gold fund abroad at a fixed price. The local silver coins paid 
for such drafts are then withdrawn from circulation, thus 
diminishing the redundancy of the currency and causing prices 
to fall. If prices threaten to fall too far, and there is a re- 
newed demand for silver money, gold may be deposited in the 
local reserves, setting free a corresponding amount of silver 
currency. In this way a stability of value is attained. 

The ratio selected between gold and the virtually token 
silver peso was 32 to i. As the price of silver from 1897 to 
1903 had varied from about 24^/. to zZd., equivalent to 34-39 
to I, this was supposed to be a safe margin. But silver unex- 
pectedly rose in price, and by the spring of 1906 was worth 
3i|^/., equivalent to less than 30 to i. In order, therefore, to 
prevent the disappearance of the silver pesos, which were now 
worth more as bullion than as coin, the act of 1906 provided 
for a recoinage, reducing the fineness of the peso from 9 to 8 
tenths, and that of the minor coins to i\ tenths. The act also 



5o6 Money, Practical Problems. [§ 205 

authorized the deposit in the Philippine treasury of United 
States gold coin for certificates hereafter to be coined, up to 
60 per cent of the total issues. Thus not only is the uncoined 
gold peso the standard, but the government paper currency be- 
comes in major part a currency of gold certificates. 

In 1904 Panama adopted the same system, the monetary 
gold unit, not coined, being the balboa, equivalent to an 
American dollar. The actual coin is the silver peso of 25 
grams, -f^ pure, /. e. 358.8 grains standard or 347.22 fine, two 
pesos being equivalent to a balboa. The peso is full legal 
tender, but as there is no free coinage, it is really a token coin, 
and officially spoken of as fractional currency. Its parity of 
value with gold is insured by a deposit in the United States of 
a gold reserve equal to 15 per cent of the issue, on which bills 
of exchange may be drawn in case of need. 

Mexico also adopted the gold-exchange standard in 1905, 
keeping the existing silver dollar or peso full legal tender, but 
ascribing to it a value equivalent to the new monetary unit, or 
gold peso of 75 centigrams pure gold, a duplicate of the Japa- 
nese yen or a little less than 50 cents, the ratio being slightly 
over 32 J to I. A gold fund of twenty million pesos, to be 
augmented by the profits of the silver coinage, was established 
partly in Mexico, partly abroad, upon which exchange might 
be sold in case of danger of gold exports ; and it was provided 
that if the bullion value of the silver peso should rise above 75 
centigrams of gold, the free coinage of gold might be author- 
ized. As a matter of fact, silver did so rise in 1906, and about 
120 million pesos, or one-half of the existing stock, left the 
country. Although free coinage had not yet been instituted, 
the currency commission was authorized to accept gold bullion 
for coinage, and as a consequence about 120 million gold pesos 
were coined in 1906-07 to replace the silver exported. Thus 
Mexico reached in 1907 a gold standard with a large actual 
circulation of gold. 

Finally, the Straits Settlements decided in 1906 to adopt 



§ 2o6] Adoption of Gold Standard. 507 

the method pursued in India from 1893 to 1S99, rather than 
the gold-exchange standard. It fixed the sterling value of the 
new silver dollar of 416 grains, -j-^y fine, established in 1903 
and not subject to free coinage, at 2s. 4^/. (instead of 2s., as 
had been expected) by offering to give dollars in new silver 
notes for sovereigns at that rate. As the government has not 
yet (1909) offered to give sovereigns in exchange for dollars, 
only an upper limit to the fluctuation of the silver dollar has 
thus far been fixed. But a gold reserve is being established 
out of the profits of the silver coinage, and the weight of the 
dollar was reduced in 1907 to 312 grains. The Straits Settle- 
ments ought accordingly soon to reach the position attained 
by India in 1899, and be ready for a gold standard. 

Thus, of the countries on the silver standard there remained 
in 1909, in addition to Ecuador and Bolivia, only China, the 
minor British colonies in the Orient, and Indo-China, and it 
is to be expected that despite peculiar difficulties incident 
to some of these nations, they will also before long follow 
the example of India, the Philippines, or Mexico. 

206. The Adoption of the Gold Standard. 

From the preceding sections it appears that the gold stand- 
ard has been wellnigh universally adopted in one of several 
ways : 

(i) The gold standard proper, with a gold coinage and 
where there is neither free coinage nor full legal tender for 
silver, as in England, Germany, and the United States. Ger- 
many really belongs in this category, although a small amount 
of silver, the old Thaler, was until recently full legal tender. 
In 1900, however, when the amount of subsidiary silver was 
increased to fifteen marks per capita, it was provided that the 
additional supply should be coined out of the old Thaler, and in 
1907 the Thaler were deprived of the legal-tender quality, mak- 
ing all the silver token-money. The United States may prop- 
erly also be counted in the first class, because the silver 



50 8 Money, Practical Problems. [§ 200 

dollar is not legal tender, either when otherwise stipulated or 
for the redemption of the gold certificates. 

(2) The limping standard, with a gold coinage, where 
the silver still possesses unlimited legal tender but is kept at 
a parity with gold by the abrogation of free coinage and the 
offer of redemption in gold. This is the case in the Latin 
Union, in India, and in Mexico. 

(3) The exchange standard, where the actual currency is 
full legal-tender silver kept at a parity with gold, not only by 
the suspension of free coinage but by the adoption either of 
(a) the gold-exchange method, where gold, although not 
coined, becomes the standard and where the silver is redeem- 
able in gold exchange ; or what may be called (<^) the fixity- 
of-exchange method, where gold is not yet the standard, but 
where the silver coin is pulled up to, or kept at, a fixed value 
by the restriction of the coinage coupled with the offer to 
give silver coins in exchange for gold at a fixed price. The 
gold-exchange method is typified in the Phihppines and in 
Panama, and existed for a short time subsequent to 1905 in 
Mexico; the fixity-of-exchange method is illustrated by the 
Straits Settlement at present, and by India from 1893 to 1899. 
Both are essentially transition methods in the evolution of the 
complete gold standard. 

Of these two transition methods the gold-exchange system 
is preferable, because it does not necessarily involve any al- 
teration in the money unit or the domestic price level. The 
fixity-of-exchange method is open to the objection that the 
sudden raising of the silver unit, or appreciation of money, 
involves a decline of prices with all the perturbations and 
disorders incident thereto. Furthermore, under the gold- 
exchange method, gold or gold-exchange is paid out for 
silver, as well as silver for gold, thus setting an inferior as well 
as a superior limit to the fluctuations of the par of exchange. 
Both forms of the transition system, however, possess the great 
advantage of retaining an actual legal-tender silver currency ir 



§ 207] Paper Money. 509 

countries addicted to the circulation of silver, and thereby 
preventing a "scramble for gold" and the still further depre- 
ciation of silver bullion which would be sure to ensue if the 
silver were demonetized. 

Thus the evolution of the money standard has completed 
its natural course. At the outset of civilization a metal of 
slight value suffices ; with the growth of trade a more precious 
metal is necessary ; and finally with the highest development 
of industry the most valuable metal becomes the standard. 
In Rome the coinage began with copper, which gave way to 
silver, until in the later Empire this was replaced as the stand- 
ard by gold. China to-day is passing in sections, at least, 
through the period of transition from the copper to the silver 
coinage. In mediaeval Europe we find first, copper, then 
silver, then both silver and gold, until the demands of modern 
life have almost everywhere witnessed the selection of gold as 
the standard most adapted to the needs of large transactions 
and most convenient for the reserves of governments and 
banks. 

While, however, gold is now the standard, the money in ac- 
tual circulation in modern times is in almost all progressive 
countries coming to be in more or less substantial proportions 
money made of paper, rather than of metal. To this we must 
now turn our attention. 

207. Paper Money. 

Paper money as opposed to metallic money may, as we 
have learned (p. 452), be classified into fiduciary or credit 
money, representative money, and fiat money. 

(i) In one sense all money, paper and metallic, is credit 
money, in that the value of all money rests at bottom on the 
belief that other people will receive it in exchange. In the 
narrower sense, however, credit money means money issued 
by credit institutions. Credit money, then, consists chiefly of 
bank notes, which are usually convertible into coin and are 



510 Money, Practical Problems. [§ 207 

not legal tender. When, however, they are both inconvert- 
ible and legal tender, they become in many respects practically 
indistinguishable from fiat money. Credit money will receive 
a fuller discussion in chapter xxxi. 

(2) Representative money consists of paper which certi- 
fies that an equivalent amount of coin or bullion is deposited 
in the government treasury. It is thus in the nature of a 
warehouse receipt, and is virtually equal to coin, the chief 
advantage consisting in the fact that it affords the public a 
more convenient medium of exchange. The larger part of the 
paper circulation of the United States is composed of these 
coin certificates. 

The gold certificates were originally authorized in 1863, in 
denominations of ^20, on deposit of gold coin or bullion. 
Their issue was suspended in 1878 (in order to facilitate the 
resumption of specie payments), authorized anew in 1882, 
again suspended in 1893 (when the gold reserve was being 
depleted by the silver agitation), and reauthorized in 1900. 
It was then provided that their issue be suspended when the 
gold reserve kept in the treasury for the redemption of the 
United States notes and treasury notes falls below 100 millions, 
a danger limit which was reduced in 1906 to 50 millions. 
The gold certificates are not legal tender, but are receivable for 
customs, taxes, and public dues, and may be counted as part 
of the lawful money reserve of the national banks. Since 
1907 they may be issued also in denominations of $10. In 
June, 1909, there were 815 millions in circulation. Partly like 
these gold certificates are the German Reichskassenscheine, 
of which there are outstanding 120 million marks, covered by 
an equal amount of gold coin in the fortress of Spandau. 

The silver certificates were issued in 1878, upon silver dol- 
lars deposited in the treasury or coined under that act. The 
denominations were limited to ten dollars and upward, but 
were changed in 1886 to one, two, and five dollars. Like the 
gold certificates, they are not legal tender, but are receivable 



§ 207] Paper Money. 511 

for customs, taxes, and public dues, and may be counted as 
part of the lawful reserve of the national banks. In June, 
1909, there were in circulation 479 millions. 

While representative money usually represents coin or 
bullion, we occasionally find certificates representing the stand- 
ard, legal-tender, fiat paper money. In that case the certifi- 
cates are obviously only as good as the fiat money which they 
represent. Of this character were the currency certificates 
authorized by the act of 1872, issued to national banks only 
in large denominations of $10,000 (originally also of $5000) 
on deposit of United States notes, and utilized chiefly in set- 
tlement of clearing-house balances. They were discontinued 
in 1 900, as the increasing volume of gold certificates rendered 
them unnecessary. 

Analogous to, although not identical with, the money hith- 
erto described, is the paper issued by government in rela- 
tively small amounts and protected, if not by an equivalent 
quantity of coin, at least by ample reserves of bullion. Of 
such character are the exchequer notes and treasury certifi- 
cates occasionally found in European countries, and the 
treasury notes issued at various periods in the United States. 
Herein may also be included the treasury notes of 1890, 
issued by the United States in that year, in denominations of 
from $1 to $1000, in exchange for the silver bullion purchased 
under the Sherman law. These notes were redeemable in 
coin (gold or silver), and were legal tender for customs duties 
and for all private debts except when otherwise stipulated, 
and could also be counted as a part of the lawful reserves of 
banks. When the Sherman act was repealed in 1893 their 
further issue ($155,931,000 being outstanding) was stopped, 
and their redemption has since then continued, until in July, 
1909, only $4,274,000 remained. 

(3) Fiat money, /. e., money issued on the simple fiat or 
declaration of government, constitutes the typical case of 
paper money. Here the government assigns an arbitrary value 



512 Money, Practical Problems. [§ 207 

to a piece of paper and invests it with legal-tender qualities. 
It has sometimes been questioned whether paper of this kind 
is really money, the objection being made that in order to 
serve as a measure of value the commodity used as money 
must possess value in and of itself. It is now, however, al- 
most universally conceded by careful thinkers that money can- 
not be confined to that made of metal, and that paper money 
is money in precisely the same sense as metallic money. It 
may not always be good money, and it is undoubtedly subject 
to serious dangers ; but as long as it serves as a medium of 
exchange and the standard in which accounts are kept, it js 
none the less money. Although it may have no value as 
paper, it may possess a value as money — a value arising from 
the demand for it for monetary purposes. In issuing coins, 
governments, as we know, often charge a seigniorage, making 
a discrepancy between the value of the coin and that of the 
bullion in the coin. As Ricardo first showed, paper money is 
a case where the seigniorage amounts to 100 per cent. Even 
debased coin, /. e., coin whose legal value far surpasses its 
bullion value, will, as we pointed out in the discussion of 
Gresham's law, retain its value if used as standard money, on 
condition that it is received by the public and that its issue is 
so limited that the total supply of money does not exceed . the 
monetary demand. Fiat money is in this respect compar- 
able to debased coin, and may equally serve as the standard 
money. 

Fiat money is almost always, but not necessarily, paper 
money. The silver rupee in India, for instance, was fiat 
money from 1893 to 1899, because the government assigned to 
it a higher value than it really possessed and was able, by limit- 
ing its supply in the face of a growing demand, gradually to 
pull it up to the desired level. So the new dollar coined in 
1906 by the Straits Settlements is fiat money, i. <?., standard 
money to which an artificial value is given by restricting the 
quantity. When government gives an artificial value to sub- 



§ 207] Paper Money. 513 

sidiary money, like the American fractional currency, we usually 
speak of token, rather than of fiat, money. 

Fiat paper money (or " soft " money as opposed to " hard " 
or metallic money) may thus perform all the important monetary 
functions within a country. Since, however, international 
debts can be paid only by gold or its equivalent, the paper 
money of any one country is a good international money only 
so far as it preserves its value in reference to gold. The two 
causes of the depreciation of irredeemable fiat money — /. e., 
paper which the government refuses to redeem in coin — are 
over-issue and distrust. 

{a) The over-issue of fiat money means that the supply, 
susceptible of easy multiplication by the printing press, may 
exceed the ordinary monetary demand of the community. In 
this case we have a simple illustration of the quantity theory 
of money, its value, after a certain amount has been issued, 
falling at a rate somewhat proportionate to the increase in the 
supply. The reader need not be reminded, however, that any 
concurrent changes in the demand for money, as explained in 
§ 191, may arrest and modify, without however seriously affect- 
ing, the influence of an over-issue. 

{/?) Distrust of the government's ability ultimately to redeem 
the fiat money is ordinarily the consequence of the mere fact 
of over-issue. It may, however, exert an independent influ- 
ence, even when the issue is not redundant. Thus, during the 
Civil War the depreciation of the greenbacks, or the premium 
on gold, frequently varied with the military outlook, without 
any synchronous changes in the supply of money or in the 
other factors affecting the demand. The mere affixing to 
the greenbacks of the words " the government will pay to 

bearer dollars," instead of the customary legend " 

dollars " (or its equivalent) found in other fiat money, both 
American and foreign, does not alter its character or add to 
its repute. The words are as unavailing as they are superflu- 
ous. For fiat money retains its value only because of the 



514 Money, Practical Problems. [§ 207 

public belief that it is as good as coin and that the government 
proposes to keep it so. If it depreciates, the public gauges 
the government's ability to redeem it by the actual and pro- 
spective economic and fiscal conditions, and not by any 
printed asseveration of intentions. An explicit promise, 
which is not observed, is less good than an implicit promise 
which is supported by the facts. What gives fiat money its 
value are facts, not promises. 

Although fiat money was first used in China in the twelfth 
century, the chief examples of modern times date from the 
eighteenth century, and are found in America and France. 
Almost all the American colonies issued paper money with 
various resultant degrees of depreciation, in some cases as 
much as eleven to one, until stopped by the British laws of 
1 75 1 and 1763. In the Revolution, fiat money was again 
utilized by the separate commonwealths as well as by the con- 
federation, the early continental issues depreciating to such an 
extent that within a few years they were redeemed at the ab- 
surd figure of forty for one. In France the fiat money under 
the Mississippi scheme of John Law in 1 716-172 1 began as a 
convertible bank-note issue, but was soon made inconvertible 
and legal tender, thus becoming indistinguishable from irre- 
deemable fiat money, and through its collapse bringing France 
to the verge of ruin. The costly experiment was not renewed 
until the close of the century, when an endeavor was made to 
finance the Revolution by the issue of '' assignats " based on 
land security. The advantage of such a system of "land- 
notes " is, however, illusory ; in pre-revolutionary Pennsylvania, 
where they were also tried, the depreciation was indeed only 
moderate, because the issue was restricted ; in some of the 
other colonies, as well as in France, where this precaution was 
not observed, the experiment ended in dire failure. 

Since the beginning of the nineteenth century, while numer- 
ous examples of depreciated fiat money are found on the Eu- 
ropean continent and in South America, the two chief cases of 



§ 207] Paper Money. ^ i e 

interest to us are the Bank Restriction in England and the 
issue of the American greenbacks. In England, the govern- 
ment, owing to the contest with France and solicitous of its 
specie reserve in the Bank of England, procured the enact- 
ment of a law in 1797 "restraining" the bank from making 
specie payments. The convertible bank notes thus became 
legal-tender fiat money, and depreciated almost fifteen per 
cent before the resumption of specie payments in 18 19. 

In the United States, on the outbreak of the Civil War, a 
law of 1 86 1 authorized the issue of fifty (subsequently in- 
creased to sixty) millions of demand notes, /. e., notes payable 
on demand. In 1862 the issue was increased to 150 millions, 
and the notes were made legal tender for the payment of all 
debts, public and private, except customs duties and interest 
on ihe public debt. The lowest denomination had originally 
been ^5, but smaller issues were now permitted. Officially 
they were called United States notes ; popularly they were 
known as legal tenders or, from their color, greenbacks. 
Later, in 1862, the issue was increased to 300, and in 1863 
to 450 millions. The result of this, coupled with the for- 
tunes of the war, was a progressive depreciation, reaching 
its climax in July, 1864, when a paper dollar was worth 
only 35 cents in gold. In 1866 the retirement of the notes 
was initiated, at the rate of ten millions a month for 
six months, and four millions a month thereafter. By the 
close of 1867 the amount outstanding had been reduced 
to 356 millions when, owing to the fear of a further con- 
traction in prices and the spread of the "soft-money idea " 
in the Middle West, the reduction was stopped in 1868, lead- 
ing to a further period of uncertainty and confusion. During 
the panic of 1873 the issues were augmented to 382 milHons, 
but after the veto by President Grant of the '/ Inflation Bill " 
of 1874 to increase the greenbacks, the Resumption Act of 
1875 provided for a retirement at the rate of 80 per cent of 
the national bank notes to be issued in their stead. On May 



51 6 Money, Practical Problems. [§207 

31, 1878, as a result of the ephemeral growth of the greenback 
party, their retirement was stopped at the accidental figure of 
^346,681,016. and the amount outstanding has remained at 
that point to the present day. In 1879 the resumption of 
specie payments was finally accomplished, and the greenbacks 
with their fixed limit have ever since been forming a constantly 
declining proportion of the American paper circulation, being 
protected and kept at par by the existence of the gold reserve. 
In 1900 the smallest denomination permitted was ten 
dollars, but in 1907 issues of one, two, and five dollars were 
authorized. 

Fiat money, then, is satisfactory only if the amount is care- 
fully restricted. Because of the inherent danger of, and 
temptation to, inflation, fiat money is inferior to credit money, 
which under a good system possesses the advantage not only 
of an elasticity but of an automatically regulated supply. 

The three kinds of paper money discussed in this section 
may from another point of view be classified into the two cate- 
gories of bank money and government money. In Europe 
almost the entire paper currency is composed of the former ; 
in the United States, as a result partly of accident, partly of 
the silver movement, partly of a certain ungrounded distrust 
of the national banks, and partly of defective legislation, 
about three-fourths of the paper circulation consists of govern- 
ment money. On the chart opposite page 516 will be found the 
details of the bank and total monetary circulation since 1878. 
The great advantage of a carefully guarded government cur- 
rency is absolute security. The convertibility of all the United 
States issues, for instance, is now assured by law, the act of 
1900 imposing on the Secretary of the Treasury the obligation 
to maintain all other forms of government money at a parity 
with gold, and assigning for such redemption purposes, partic- 
ularly of the greenbacks, a special reserve fund of 150 million 
dollars of gold, to be replenished in case of need by the sale 
of bonds. On the other hand, the disadvantages of govern- 



BANK-NOTES, PAPER MONEY, GOLD AND TOTAL MONETARY 
CIRCULATION IN THE U.S. FROM 1878 TO 1908. 



3500 
3000 
2500 
3000 
1500 
1000 
500 
































































3500 
3000 
2500 
2000 

D 

1500 

1000 

A 

500 




























































































































\ 






























































1 






























































1 






























































1 




A Bank-note Circulation. 

D j Total Paper Money (Treasury Notes, U.S. 

( Notes, Certificates and Banl<-notes.^ 
C Total Monetary Circulation. 
D Stock of Gold. 




















1 






















/ 




















/ 




















/ 




















/ 


C 




















/ 

r 




























































y 




























































f 


























































































































t 














i 














































/ 














/ 














































/ 














/ 
































.^ 










/ 














y 




































u 


/ 


\ 




/ 






















































\ 


/ 




\ 


/ 






















/ 






























f 
























R 


f 


/ 


-J 
























/^ 


— 






















_^_ 





..- 


-- 
























y 


— 


■^ 


y 
























f 










/ 


















y 






















B 




._ 


.. 


_ 


.- 












/ 
















/ 






















f' 


















^ 


-- 


■~ 
















/ 





















y 


















/ 




















c 


^ 


/' 








... 


.'" 


*'• 





/ 




















1 


















































n 










1 






















B 


— 


— 














. 


.^' 


^^ 


— 


•^, 


,' 






,, 


», 


/ 






















^ 












„• 


— 


.' 


'" 








































,y 


/ 










, 


'" 












































/ 


-^ 








A 



















































— 
























- 


-D 


f 
















^ 


■~. 


s 




A 








_ 


— 








'' 








































































































































00 QOOOOOajajOOQOOOOOOOQOQOQOQOOOOOOOOOCOOO OOOC5C5 CiOOOO o 



§ 207] Paper Money. 517 

ment paper consists not only in the temptation to inflation, 
but also in a certain rigidity or incapacity to adjust itself to 
the varying needs of the business community. Bank money, 
on the other hand, as we shall see, may be made to possess all 
the safety of government money, without incurring any of its 
hazards. 



CHAPTER XXX. 

CREDIT AND BANKING. 
208. References. 

J. S. Mill, Principles, bk. iii, chs. xi-xiii ; W. S. Jevons, Investigations 
in Currency and Finance (1884), chs. i, v-viii, and Money (1879), chs. 
xix-xxii ; H. D. McLeod, 77^,? Theory and Practice of Banking (15th ed., 
1892) ; C. F. Dunbar, Chapters on the History and Theory of Banking 
(2d ed., 1901), chs. ii and iv ; and Ecoiiomic Essays (ed. by Sprague, 
1904) ; J. F. Johnson, Money and Currency (1905), ch. iii ; F. A. Walker, 
Political Economy (1888), part 3, ch. vi ; D. Kinley, Money (1904), ch. xi ; 
Horace White, Money and Batiking (2d ed., 1902), bk. iii, chs. i-iii; 
T. Veblen, Theory of Business Enterprise (1904), ch. v; W. Bagehot, 
Lombard Street ( 1873) '■> ^ • ^- Scott, Money a7id Banking (1903), chs. vii, 
viii-xi; T. Hankey, Principles of Banking (1877); F. A. Cleveland, 
Funds and Their Uses (1902) ; J. G. Cannon, Clearing Houses (1900) ; W. 
G. L. Taylor, The Influence of Credit on Prices (Yale Review, XV, 1906) ; 
Minnie T. England, Statistical Inquiry into the Influence of Credit upon 
the Level of Prices (Univ. of Neb. Studies, VII, 1907) ; J. P. Norton, ^'/a- 
tisiical Studies in the New York Money Market (1902) ; R. H. Inglis Pal- 
grave, Bank Rate arid the Money Market in England, France, Germany, 
Holland, and Belgium, 1844-igoo (1903); J. V. Komorzynski, Die 
Natiotialokonomische Lehre vom Kredit (1903). 

209. The Nature of Credit. 

Credit is an exchange or transaction which consists in the 
temporary transfer of the usance of weahh. The wealth may 
be composed of concrete goods, of a fund of capital, or of a 
mere right or privilege. In modern times most of the wealth 
so transferred has come to consist of money, so that credit 
nowadays primarily implies a temporary transfer of money or 
rights to money. The pivotal point, however, is the tempo- 
rary character of the alienation. 

We must be careful not to confuse the legal with the eco- 
nomic conception. Legally, if we part with the ownership of 

518 



§ 209] Nature of Credit. 5 1 9 

anything, it is a sale ; if we part with the possession while 
retaining the ownership, it is a loan. Economically, the es- 
sence of credit is the temporary usance of wealth. All credit 
is really loan credit. A sale on credit is, from the economic 
point of view, no sale at all. Legally, the ownership is trans- 
ferred and the payment is deferred ; economically, it is a 
grant to the purchaser to utihze the commodity subject to the 
prior economic right of the seller to have a certain sum of 
money returned to him. The economic alienation does not 
become complete until the payment of the money is effected, 
that is, until the credit expires. In the interval there is a 
temporary usance. 

From this fundamental fact flow three consequences: (i) 
Since the transfer is temporary, it must terminate at a future 
date. The loan must be repaid, and if in the meantime the 
subject of the loan has disappeared, its economic equivalent 
must be returned. The understanding that a payment is to 
be made in the future in return for something that is done 
at present is of the essence of credit. (2) Whenever com- 
modities are loaned and payment is deferred until the ex- 
piration of a certain period, there is, strictly speaking, a case 
of credit. In the overwhelming mass of modern business 
transactions, however, what is loaned is not a commodity, but 
a sum of money. Credit thus virtually becomes a contract 
for the future delivery of money, or a " short sale " of money, 
and credit is thus best discussed in connection with money. 
What a borrower often wants is indeed commodities that he 
can buy with the money. But what he actually borrows is not 
commodities, but money itself. What he promises to repay 
in such cases is not any equivalent value of the commodities 
secured, but a definite sum of money, irrespective of the fact 
whether the money at the time of repayment is worth more or 
less than at the date of borrowing. (3) The lender must 
trust the ability of the borrower to meet his obligation at the 
stipulated date. He must believe, or have credit, in him. All 



520 Credit and Banking. [§ 209 

credit rests on confidence, — a confidence which runs through 
the whole gamut of risk. If a merchant " opens a line of 
credit " with a customer, his sole security may be the naked 
expectation that the bill will finally be paid. If an investor 
parts with his money to a corporation in return for a bond, his 
security consists in the ultimate right of foreclosing the mort- 
gage. If a banker lends capital, he may demand the deposit 
of "collateral," that is, securities whose market value may 
considerably exceed the amount of the loan. 

The essence of credit, then, is the right of enjoying some- 
thing, in most cases money, the ultimate economic title to 
which belongs to another. According to the use made of the 
enjoyment we distinguish between production and consump- 
tion credit. If we borrow money from a friend or pawn a 
watch in order to buy a meal, the credit is for purposes of 
consumption. If we borrow funds to increase our business, 
the credit is for purposes of production. With the advent of 
modern economic conditions, credit has become to an over- 
whelming degree productive credit. This explains its advan- 
tages and its dangers alike. If the goods, capital, or privileges 
are so utilized by the borrower as to yield a surplus over and 
above that part of the produce requisite to pay for the use of 
the loan, credit performs the function of capital and may be 
deemed equivalent to an increase of capital. In that sense 
credit might be called auxiliary capital. It does the work of 
capital because it tends to increase the productive forces of 
the community. By this is not meant that credit is actually 
capital, for if the capital is in the hands of the borrower, it is 
withdrawn from those of the lender. In the hands of the bor- 
rower, however, the capital does more good than in those of 
the lender, for otherwise it would not be transferred. To the 
lender the capital is, so to speak, passive ; to the borrower, 
active. To the extent that credit puts capital where it is more 
productive than it would otherwise be, it is equivalent to an 
increase, or at all events to an increased usefulness, of capital. 



§ 2io] Instruments of Credit. 521 

On the other hand, if the funds secured through credit are 
unwisely utiHzed or dissipated, they diminish the productive 
forces of the community, because the debtor not only wastes 
his own efforts, but is unable to replace the borrowed capital. 
Owing to the facility with which modern credit can be ob- 
tained, it is peculiarly susceptible of abuse. If a man has to 
create or to accumulate capital, he will be moderately careful 
in its employment ; if he secures it on credit, he is more apt to 
take chances. He is relieved from immediate cares, and is 
likely to paint the future in roseate hues. Inasmuch as credit 
rests on confidence, it is human nature, in dealing with the prop- 
erty of another, to have a misplaced confidence in one's self. 

210. Instruments of Credit. 

Credit, like capital, is either commercial, industrial, agricul- 
tural, or financial. In the broader sense all credit is financial, 
because money or money's worth must be repaid. But the 
classification is none the less useful from the point of view of 
the credit instrument. 

Commercial credit takes the form, apart from the ordinary 
book accounts and due bills, of promissory notes and drafts or 
bills of exchange. A promissory note is a written promise to 
pay a certain sum to the person designated as payee, either 
on demand or at the expiration of a definite period. It can 
be indorsed by the payee, and is then further negotiable, the 
indorser making himself responsible (unless he adds the words 
"without recourse") in case the note is not honored at ma- 
turity by the original maker. If there is one indorsement on 
the note, it is called double-name paper, because both maker 
and indorser are responsible. If there are two indorsers, it is 
called three-name paper. 

A draft or bill of exchange is a written order addressed by the 
seller of merchandise to the purchaser, requesting the payment 
of a definite sum. If payable on demand, it is called a sight 



522 Credit and Banking. [§ 210 

bill ; if at the expiration of a fixed period, a time-bill, which is 
itself either a short or a long bill, according to the period 
for which it runs, ranging ordinarily from thirty days to six 
months or more. The seller of the goods is said to draw upon 
the purchaser, and is hence called the drawer of the bill. A 
time-bill is at once presented to the '^drawee," who by writing 
his name below the word "accepted" is said to "accept" it, 
thus virtually converting the bill into his own promissory note. 
By negotiating the bill, the seller of the goods can hence secure 
immediate payment, less the commission or discount. If both 
drawer and drawee live in the same country, the bill of ex- 
change is termed a domestic bill ; if they live in different coun- 
tries, it is a foreign bill. In America the domestic bill is 
usually called a draft. Oftentimes it is sought to add to the 
personal security of the note or bill. In the case of promis- 
sory notes, the collateral securities pledged are generally stocks, 
bonds, and mortgages, and the note is then called a collateral 
note. Drafts or bills, on the other hand, are frequently accom- 
panied by certificates testifying to the possession of commodi- 
ties, like bills of lading, dock warrants, and warehouse and 
elevator receipts. In the case of a bill of lading it is custom- 
ary to attach the invoice and the insurance policy. Such bills 
are usually called " documented " bills. Of this character also 
are the grain or cotton notes and the cattle paper in the South 
and West. Such notes and bills are naturally more readily 
negotiable than those resting on mere personal security. In 
the case of a future, instead of a past, transaction, the notes 
and bills are called accommodation paper. An intending pur- 
chaser "accommodates" the future seller by giving his note at 
the beginning, instead of at the conclusion, of the transaction. 
Accommodation paper, however, is often issued without any 
intention of a real transfer of goods, and thus affords ample 
opportunity for speculation. 

As opposed to these promissory notes, drafts, and bills, which 
constitute the usual " commercial paper," industrial credit in- 



§ 2io] Instruments of Credit. 523 

struments comprise documents or securities connected with 
corporate industry like certificates of stock, and bonds which 
represent contingent rather than actual ownership. The prin- 
cipal forms of these have been described in § 141. Agricul- 
tural credit instruments assume the form of notes accompanied 
by mortgages on the land, the farm implements, or the crops. 

Financial credit in the narrower sense is primarily bank credit, 
the instruments for transferring the funds being chiefly checks, 
drafts, and letters of credit. A check is a written order from a 
depositor in a bank directing it to pay a certain sum of money 
to the person designated, who may then by indorsement nego- 
tiate the check further. A check may be certified by the 
cashier stamping that word across its face and adding his name 
at the bottom, in which case the depositor's account is at once 
debited with the amount, the certified check becoming the 
bank's promise to pay rather than an order on the bank to pay. 
A cashier's check is an order on a bank signed by the cashier 
and, like the certified check, is really a promise to pay on the 
part of the bank. An ordinary check, although technically only 
an order on the bank, has become legally an implied promise 
to pay on the part of the maker or drawer of the check. A 
bank draft is a written order addressed by one bank to another 
directing the payment of a certain sum to a third party. The 
first bank is said to draw upon the second, where it keeps a de- 
posit or has funds to its credit. If, however, the first bank 
does not desire to do this, and if its customer wishes to remit 
money, the bank gives him, in exchange for his own check, 
what is known as a bank certificate, or certificate of deposit, 
payable to the order of a certain payee. Finally, a letter of 
credit is a document issued by a bank (or banker) directed to 
its correspondents abroad, authorizing the holder to draw upon 
the issuer or some central agent, up to a certain amount and 
within a certain period like one or two years. As the holder 
usually draws the sums by instalments through the medium of 
a draft or bill of exchange, the amounts so drawn are noted on 



524 Credit and Banking. [§ 211 

the letter, showing at a glance how much of the credit remains 
unexhausted. 

Commercial, industrial, and agricultural credit all finally 
converge in the bank, which is the lender par excellence. 
Since modern credit operations centre in the bank, the study 
of credit is in large m_easure the study of banking. 

211. The Development of Banking. 

The word "bank " was formerly supposed to be derived from 
the banc or bench on which the early money-changers kept 
their coins, so that the banker would be the " bencher," as the 
money-changers were called in Greece (^rpaTreCtTai) and Rome 
(mensarii). The more approved modern derivation, however, 
is from "bank" in the sense of a heap or pile, as in sand-bank 
or mud-bank. Banco in mediaeval Italy was accordingly used 
to signify a mass or fund of capital, and the early colonial 
"banks of money" in America denoted batches or issues of 
paper money. Originally designating a fund of capital, a bank 
has .to-day come to mean the institution dealing in such funds. 
As the result of a long evolution the modern bank conducts 
three kinds of business, — money dealings, credit transactions, 
and promoting or syndicate operations. 

Dealings in actual money were the most primitive occupa- 
tion of the bankers. The early money-changers made it a 
business to exchange one form of coin for another, domestic 
or foreign. A large part of this business is still done by pri- 
vate bankers and money-brokers, although most large banks 
with international relations exchange foreign money, and all 
banks stand ready to exchange one kind of domestic money 
for another. Many banks also, when occasion demands, make 
actual shipments of money from place to place and conduct 
arbitrage operations in silver, i.e., take advantage of the momen- 
tary discrepancies in the price fluctuations in different coun- 
tries by purchasing in the cheaper, and simultaneously selling 
in the dearer, market. 



§ 21 1] Development of Banking. 525 

Far more important and distinctive, however, are the credit 
operations. These take the five forms of remittances, deposits, 
advances, discounts, and note- issues. 

(i) Historically it was an easy transition for the money- 
changers, instead of returning to the individual himself an 
equivalent for the sum received, to remit, /. e. pay by remittance, 
a corresponding amount to some one in another place. To 
accomplish this it became necessary to have in these other 
places agencies or correspondents on whom orders to pay could 
be drawn. Transactions of this kind are found among the 
Babylonians, as well as in Greece and Rome. The early bills 
of exchange were thus primarily devices to avoid the necessity 
of shipping actual cash in settlement of debts. As every town 
in the middle ages considered even its neighbor a foreign town 
(§ 32), the early bills of exchange were foreign bills. Later, 
when the spirit of nationality developed, the bills drawn on 
towns in the same country came to be called inland or do- 
mestic bills or, as in America, drafts. At first the bills were 
not negotiable. Gradually, however, the custom arose of trans- 
ferring them by indorsement and delivery, and there grew up 
a legal system based on business usages as to conditions of ne- 
gotiation, presentation for acceptance, payment after certain 
days of grace, and protest in case of dishonor. In the United 
States, where the law in separate commonwealths still differs 
materially, a measure of uniformity is being brought about by 
the model negotiable instruments code framed by the American 
Banking Association and at present enacted in many states 
and territories. Remittances are now also made by means uf 
telegraphic and cable transfers, express orders, and government 
postal notes or money orders. The principle underlying all 
these methods is identical : the actual remittance of money 
has been replaced by the transfer of credit. 

(2) When people found that they could pay their debts 
elsewhere through the money-changers, it was again a short 
step to intrust to them sums for safe-keeping. Thus arose the 



526 Credit and Banking. [§211 

custom of making deposits of money and bullion. In the 
mediaeval Italian towns and above all in Venice, the cainpsores, 
or money-changers and dealers in foreign exchange, came at 
the close of the thirteenth century to be called hancherii, or 
bankers, from the capital sum or "bank" in their possession. 
In London, somewhat later, it was the goldsmiths who per- 
formed the same function. In the course of time serious 
abuses arose in connection with the custody of the deposits 
intrusted to the private bankers, and finally by the acts of 1584 
and 1587 Venice instituted the public Banco di Rialto or 
Banco della Piazza, the first bank of modern times.^ In 1619 
it was supplemented by, and in 1637 merged into, the Banco 
del Giro, or transfer bank, so-called because the depositors 
could not only remove their deposits on demand but transfer 
them to the credit of some other depositor. The giro or trans- 
fer on the books could, however, be made only by word of 
mouth and in the presence of both parties. When similar 
causes, as well as the desire to secure a standard free from 
the fluctuations of the depreciated coins in actual circulation, 
led to the establishment of the government Wisselbank (ex- 
change bank) in Amsterdam in 1609, merchants were com- 
pelled to keep their accounts in these assignable deposits known 
as bank money, for which the town was now responsible, and it 
became customary to make the transfers by a written order. 
This order, however, had at first to be presented in person by 
the payer, and became assignable to the payee, who had also to 
be a customer of the bank, only the day after. When the giro 
banks at Hamburg and Nuremberg were founded in 1619 and 
162 1, these written orders gradually acquired more of the 

1 The bank of St. George at Genoa in the fifteenth century, which is 
sometimes spoken of as the first bank, was indeed the first modern cor- 
poration, its stockholders, to whom was intrusted the administration of 
certain mortgaged revenues, being the subscribers to the government 
forced loan. It was called a bank, because of this fund of capital {banco 
or monte). But it did not carry on the banking business referred to 
above. 



§ 2ii] Development of Banking. 527 

characteristics of the modern check, and came into general 
use. We even hear of such a giro bank in Liibeck in the 
fifteenth century. 

The early banks were thus institutions receiving cash de- 
posits, dealing in bills of exchange, and making transfers from 
one depositor to another. Deposit banking in modern times 
forms only one branch of the business, and the deposits them- 
selves, as we shall see, have changed to a great extent from 
deposits of cash to deposits of credit. During the nineteenth 
century, however, there developed a special form of bank de- 
signed for the sole purpose of securely preserving cash deposits. 
These are known as Savings Banks ^ which, in contradistinction 
to most commercial banks, pay interest on deposits, do not 
treat them as assignable by transfer, and are permitted to in- 
vest their funds only in specified securities. While the savings 
banks are intended primarily for small deposits, there have 
arisen still more recently the Trust Companies, to which 
larger sums may be intrusted. These, however, as opposed 
to savings banks, often carry on what amounts virtually to a 
general banking business. Finally, many banks receive de- 
posits of securities and silverware to he kept in their vaults, 
acting, however, in this respect like storage warehouses or safe- 
deposit companies. 

(3) As the private bankers accumulated large deposits, it 
was natural that they should begin to compete with the money- 
lenders, especially as the latter owned their own capital, while 
the bankers were able to lend the capital deposited with them 
by others. We find this combination of deposit-banker and 
money-lender in Greece and Rome, as well as in mediaeval 
Europe. When the deposit banks, however, were first formed, 
the safe-keeping of the deposits was deemed incompatible 
with their loan to others. In the bank of Amsterdam, for in- 
stance, it was not until 1656, and more definitely in 1683, that 
the bank began to make advances upon deposits of coin. The 
advances took the form of the granting of a credit of so much 

1 Date of origin ; Germany, 1765; England, 1797 ; United States, 1816. 



528 Credit and Banking. [§ 211 

bank money on the books of the bank, the depositor being 
given a receipt entithng him to withdraw it within a specified 
time upon returning the bank money. Gradually, and es- 
pecially in the later banks, other commodities besides coin 
and bullion were received in exchange for advances. From 
the fact that this developed at first in the Italian towns, it 
came to be known as the Lombard business, a term still em- 
ployed in Germany to-day, and which appears in a corrupt 
form in the English and American projects of the seventeenth 
and eighteenth centuries for the so-called banks of " merchan- 
dise-lumber," Because of the fact that ordinary commodi- 
ties are not always immediately salable, and because it becomes 
embarrassing for the bank to turn themselves into storage 
warehouses, the character of these advances has been much 
restricted, and the modern commercial bank Hmits itself to a 
large extent to making loans either on strictly commercial 
paper or on collaterals which are immediately convertible 
into cash. Special institutions have accordingly sprung up, in 
modern times, designed to supply the need of advances on 
these particular forms of property, and on the less easily real- 
izable securities like land. Such, for instance, are the Agri- 
cultural Banks in Europe, Egypt, and since 1906 in the 
Philippines ; the mortgage banks in Germany and Italy, the 
Credit Foncier in France, and the Bond and Mortgage com- 
panies, Mortgage and Security companies. Mortgage Guarantee 
companies. Credit companies, and Loan and Investment 
companies in the United States. 

(4) Having once begun to make advances on coin or 
commodities, it was again but a short step for the private 
bankers to make loans on more intangible security, that is, to 
lend their credit to a customer or to open an account for him, 
either on his written promise to pay, or on some one else's 
order to pay. Since the promise fell due in the future and 
the banker advanced the cash or opened the account at once, he 
deducted a certain amount from the face of the note or order 



§ 21 1] Development of Banking. 529 

as a discount, and the operation as well as the paper itself 
came to be called a discount. We find traces of this practice 
among the private bankers in Venice and Amsterdam, as well 
as among the goldsmiths in England. The development was 
gradual, until in modern times discounting has almost every- 
where become an important function of the commercial bank. 

(5) In the meantime the banker had learned that in lieu 
of extending his credit to the customer by opening an account, 
he might issue his own promise to pay, in the shape of a 
banker's note. Such, for instance, were the goldsmiths' notes 
issued in England. The acceptability of these notes as a 
medium of exchange depended largely on the reputation of 
the individual banker, and the institution of banking corpora- 
tions with these powers was designed to increase their safety. 
The first bank of issue, as the corporations were called, was 
the Bank of Sweden, founded originally as a private institution 
in 1656, but converted into a public or government bank in 
1668. The earliest important private banks of issue were the 
Bank of England, founded in 1694, and the Bank of Scotland 
in 1695. These banks differed from the older deposit banks 
not only in that they were banks of issue, but also in that they 
were invested with a corporate form. With them modern 
banking may be said to begin. Historically, in fact, the 
business of issue preceded that of discount. Banks were now 
formed to issue notes to serve as currency, and the discounting 
of commercial paper grew up only very gradually. But the 
discount business slowly overshadowed the other, until at the 
present time, especially in Anglo-Saxon countries, the note- 
issue function has become subsidiary. 

Finally, banks have added to these money and credit deal- 
ings all kinds of transactions in public and private securities. 
Sometimes they act as agents for governments and for private 
corporations in cashing coupons and dividends ; sometimes 
they carry on independent dealings in the arbitrage of securi- 
ties ; sometimes they participate in the new issues of govern- 

34 



53° Credit and Banking. [§212 

ment bonds and of industrial securities through promoting 
syndicates. Here, however, a distinction must be drawn be- 
tween the English and American banks on the one hand, and 
those of the European continent on the other. In the former 
countries, where the deposits are of vastly greater extent than 
in the latter, it is not considered prudent to jeopardize the 
liquid assets by such industrial investments, and in the United 
States in especial it is the Trust Companies rather than the 
banks which aid the private bankers in financing the industrial 
syndicates. 

212. Modern Bank Operations. 

Of all these various classes of business the credit transac- 
tions have become the most important and the most distinc- 
tive. The chief function of a modern bank may thus be declared 
to be that of dealing in credit or of rendering credit mobile. 
This is now accomplished primarily by the three operations of 
discount, deposit, and issue. 

(i) A business man finds that in order to meet some past 
or future obligation he needs funds, not necessarily of money, 
but of any customary means of payment. If he has sold goods 
on credit, he usually receives a promissory note on which the 
bank will give him, in cash or in an equivalent right to de- 
mand payment, a sum equal to the par value of the note less 
the interest during the time that the note has to run. This 
deduction involves a discount, and to discount a note thus 
means to pay its face value less the interest still to accrue. 
Legally, the transaction is a sale or exchange of rights : the 
bank buys the note or the right to demand payment from the 
maker, and sells to the merchant the right to demand pay- 
ment from it. Economically the transaction is a loan, be- 
cause the bank virtually lends to the merchant the use of the 
capital represented by the note (less the discount). The 
bank thus lends its own credit, and this loan of credit is a 
contract for the future delivery of money by the bank. It is 



§2 12] Modern Bank Operations. 531 

for this reason that bank credit is sometimes spoken of as a 
" short sale " of money. 

The borrower, in Ueu of presenting some other man's promis- 
sory note for discount, may offer his own, either in person or, as 
is customary in England and America, through the bill-broker 
or note-broker. He may also offer some other form of commer- 
cial paper mentioned in § 210, such as bills of exchange, drafts, 
and cotton, grain, or cattle paper. The bills receivable, or the 
paper thus acquired by the bank through the process of dis- 
count, are called discounted bills, or in America simply dis- 
counts. They really become part of the investments or 
securities of the bank, and in England they are classed as dis- 
counted bills under the head of the private securities. Fre- 
quently the borrower will desire to borrow on collaterals — 
that is, on securities, like government bonds and corporate 
stock or bonds. The loans made in this way are usually called 
advances in England, and classed as such under either the 
public or the private securities held by the bank. In the 
United States they are included with the others under 
the single category of " loans and discounts " ; properly so, 
because the principal evidence of debt which together with 
the collateral is put into the "loan envelope " is, in the case 
of time loans, usually a promissory note or, in the case of call 
loans, a " stock note " which empowers the lender to close 
out the collateral in case of default. The mere fact that in 
such cases the interest is usually paid on the maturity of the 
loan, and not as with discounts at the inception, constitutes of 
course no difference in principle. Loans and discounts, or, as 
they are called in England, bills discounted and temporary 
advances, thus figure among the resources of the bank. They 
form a part of its assets, because they represent sums due to 
the bank by the borrowers or their assignees. 

(2) The question now arises as to the shape in which the 
bank lends its credit. When a bank discounts commercial 
paper or makes loans, it may, instead of paying actual money 



532 Credit and Banking. [§212 

which the borrower probably does not want, place on its books 
an equivalent sum to his credit. In other words, it may open 
in his name an account, which can be drawn out on demand 
by check. This deposit, which stands to the credit of the 
borrower, thus becomes a liability of the bank : the bank owes 
the amount to the depositor. Deposits and discounts hence 
figure on opposite sides of the bank's balance sheet. The de- 
posits are what the bank owes the individuals ; the loans are 
what the individuals owe the bank. The deposits represent 
bank liabilities ; the loans and discounts represent bank assets. 

A deposit may also arise without any discount, as when one 
hands to the bank a sum of money or a credit instrument like 
a check which is immediately payable and collectible without 
any discount. In every case, however, the deposit, whether 
arising with or without a discount, gives the depositor a right 
to draw on the bank to the extent of the deposit. Legally, a 
deposit is, therefore, a sale of money or money's worth in ex- 
change for a right to demand a corresponding sum at any 
time in the future. The deposit may be a deposit of money 
or of bank credit. In former times, as we have learned, the 
banks dealt only in cash deposits ; nowadays they deal pri- 
marily in credit deposits. An investigation by the Comptroller 
of the Currency in 1896 showed that only about ten per cent 
of the total receipts, and less than ten per cent of the deposits, 
of the national banks, consisted of actual money. A properly 
managed bank will always endeavor to keep the discount ele- 
ments in the deposits of such a high character that they are 
virtually as good as cash, /. e. speedily convertible into cash. 

The ordinary bank deposits must not be confused with the 
special deposits mentioned in the last section, where particu- 
lar objects or securities are placed in the bank vaults for safe 
keeping. Here the transaction is not a sale at all, but legally 
as well as economically a loan, because the identical thing 
must be returned. This is, however, as we have seen, more 
properly a storage warehouse or safe-deposit transaction. 



§212] Modern Bank Operations. 533 

An interesting form of deposit is found in Scotland under 
the name of " cash credit." This consists of an open credit 
or drawing account granted by the bank to some one vouched 
for by at least two " cautioners " or sureties. These credits 
are generally given in sums of from ^100 to ^{^500, and the 
customer is expected to draw on the bank only in instalments, 
interest being charged on the amounts actually drawn. A 
cash credit, which is thus a right to overdraw an account up 
to a certain point, is more economical than an ordinary loan, 
and is peculiarly fitted for frugal but enterprising small mer- 
chants, and for a country where large operations in ordinary 
commercial paper are infrequent. 

(3) Sometimes the borrower who presents the note for dis- 
count, or the depositor who draws a check, elects to receive 
money. In place of giving coin or government paper, the 
bank may prefer to issue its own promissory notes. These 
bank notes enter circulation in convenient denominations and 
form a part of the currency. As such they will receive atten- 
tion in the next chapter. The point to be emphasized here is 
that, so far as the bank and the borrowers are concerned, the 
economic essence of the bank note is identical with that of de- 
posits. Both are bank liabilities, because the bank must ulti- 
mately pay its note or honor a requisition on the deposit ; both 
involve the granting of credit to the borrower, who acquires the 
right to demand payment of a given sum from the bank. The 
function of issue differs in form, but not in substance, from that 
of deposit. So far as the borrowers are concerned, it often makes 
little difference to them whether they secure the means of pay- 
ment through actual money or through the possibility of draw- 
ing checks or drafts on the bank. It is for this reason that 
checks and drafts are sometimes spoken of as deposit currency 
in contrast to the note currency. They differ from bank notes 
in that they are not usually made out for even sums, and that 
they cannot be transferred without indorsement. To this ex- 
tent they form credit of limited, rather than of general, accept- 



534 Credit and Banking. [§ 212 

ability and are not available for " change " or till money. But 
for all the larger payments which ordinary merchants have to 
make, the credit in the form of a deposit is equally as good as 
the credit in the form of a bank note. Moreover, since bank 
notes are credits to the borrowers, they are liabilities of the 
bank. Bank notes, like deposits, are liabilities of the bank in 
contrast to loans and discounts, which are assets. 

These three operations of discount, deposit, and issue com- 
prise virtually the whole of modern credit transactions. For of 
the two other categories of credit operations referred to in the 
last section, namely advances and remittances, the former are 
now really only a species of discount, and the latter are ac- 
complished by means of a combination of discount and de- 
posit. The last point, however, illustrating the method of 
making remittances or payments as between different com- 
munities through drafts or bills of exchange, deserves further 
mention. 

In the United States at the present time if a merchant A 
outside of New York has a payment to make to B in New York, 
he goes to his bank, which keeps a deposit or balance with a 
New York bank, and buys an order on the New York institu- 
tion, which will be paid there and debited to the original bank. 
If the bank happens to be in a small town O, which has no 
direct dealings with New York, it must have a " correspond- 
ent " in some neighboring city P where it carries a deposit 
account, and from which it secures blank drafts on New York, 
that can be filled out by the bank in O and sold to its custom- 
ers. The New York bank charges the amount to P, which in 
turn debits it to O. Thus only the large banks need keep bal- 
ances in New York. In the same way, when a merchant X in 
New York has bought raw materials from Y in O, he pays for 
it by a check or draft on a New York bank which will be cashed 
in O and perhaps sent for collection to P, where the bank 
stands in direct relation with New York. Thus, instead of A 
in town O sending money to B in New York, and X in New 



§ 212] Modern Bank Operations. 535 

York sending it back to Y in O, nothing passes between New 
York and O except these pieces of paper. 

Moreover, since New York is the commercial centre of the 
country with which every large merchant has direct or indirect 
dealings, New York exchange, /. e , drafts upon New York 
banks, becomes the easiest method of paying debts as between 
any two other places. An Omaha merchant who desires to 
pay a debt in Topeka may find difficulty in buying a draft 
on Topeka because Omaha banks do not keep balances there. 
But both Omaha and Topeka banks keep balances either 
directly in New York banks or indirectly through their Chicago 
correspondents. The Omaha bank will accordingly draw a bill 
on New York, or will discount the merchants' own bill drawn 
on New York, and the Topeka bank will be glad to accept it 
because it can in turn utilize the bill. Thus there is always a 
ready market for New York exchange. 

Ordinarily the sales and purchases between any two parts of 
the country balance each other. A community can in last in- 
stance buy the things it needs only with the things it produces. 
If it sells more, it will ribrmally buy more. Hence, in the long 
run, the demand in any section for drafts or bills will equal the 
supply. At any given moment, however, there may be a dis- 
crepancy. When the wheat crop is harvested and moved, the 
western communities are selling more, whereas at other times 
of the year they will be buying more. Thus, not to speak of 
any other causes, there will be seasonal fluctuations in the de- 
mand for and the supply of drafts. When the demand for 
drafts exceeds the supply, the banks will not give dollar for 
dollar, but will charge a premium for New York exchange, 
which, howcvir, can never exceed the cost of shipping cur- 
rency by express from the place in question to New York, and 
which reaches that point only for short periods. Vice 7'ersd, 
when the supply of drafts exceeds the demand. New York ex- 
change will be at a discount. In other countries where, as we 
shall see, there is a more elastic system of currency, the need 



536 Credit and Banking. [§ 213 

of actually shipping money from town to town within the coun- 
try does not arise at all, these remittances, especially on the 
European continent, being made by transfers of entries on the 
books of the large central banks, through payments to the 
branch offices. I^ven in the United States, however, the 
actual shipments of currency are infinitesimal compared with 
the total amount of remittances. 

213. Bank Statements. 

Every bank needs a certain amount of capital to inspire 
confidence. The profits of a bank are derived chiefly from 
the fact that it secures without interest the use of an additional 
capital represented by the bank notes or deposits, and that it 
can safely loan on interest or invest a part of this capital in 
lucrative enterprises.^ As Ricardo said a century ago, real 
banking begins only when the institution uses other people's 
capital instead of its own. The benefit to the borrower, again, 
consists in using the bank's credit in lieu of his own capital. 
Banks fulfil their true function when they extend to their cus- 
tomers the utmost possible facilities compatible with solvency. 
If they are reckless in their discounts, if they accept dubious 
paper and thus impair their assets, if they unduly extend their 
deposits or unwisely enlarge their note issue, and thus swell 
their liabilities, they may find themselves unable to meet the 
maturing claims. In old and conservative communities banks 
may sometimes be relied on voluntarily to keep within the 
limits of safety ; in most countries, even if it is not true that 
" free trade in banking is free trade in swindling," experience 
has shown the need of some governmental supervision. Apart 
from all manner of restrictions on the bank operations them- 

^ Strictly speaking, the bank makes a slight extra profit through the 
technical discount itself. If a note for $io,ood at six per cent has thirty 
daj's to run, the bank will deduct $50, and credit $9,950. The present 
worth of $10,000, however, is 24I cents more than this: that is $9,950,241- 
at six per cent for thirty days equals $10,000. This difference accrues to 
the bank. 



§ 213] 



Bank Statements. 



537 



•« selves, the chief safeguard is found in the publicity secured 
through compulsory periodical reports and examinations. 

As an illustration of bank statements we present herewith 
the accounts of the national banks in the city of New York on 
September 4, 1905. 

CONDITION OF THE NATIONAL BANKS IN NEW YORK 
CITY, SEPT. 4, 1905. 





Resources. 




Liabilities. 


Loans and discounts . 


#725,826,923.78 


Capital stock . . 


5107,050,000.00 


Overdrafts 


240,198 


37 


Surplus fund . . 


90,750,000.00 


Bonds for circulation . 


54,460,850 


00 


Undivided profits . 


34,907,097.95 


Bonds for deposit . 


7,478,000 


00 


National Bankcircula 




Other bonds for deposits 


1,209,400 


00 


tion 


S2,935i927-5o 


U. S. bonds on hand . 


642,870 


00 


State Bank circulation 


16,530.00 


Premiums on bonds 


1,717,172 


54 


Due to National Bank 


285,815,239.79 


Bonds, securities, etc. . 


136,590,063 


18 


Due to State Banks 


88,840,306.00 


Bankiiighouse, etc. . . 


22,125,323 


33 


Due to trust co.'s, etc. 


148,202,909.10 


Real estate, etc. . . . 


3.364,257 


01 


Due to reserve agents 




Due from Nat'l Banks . 


52,540,217 


56 


Dividends unpaid . 


70,583-84 


Due from State Banks . 


9,190,048 43 


Individual deposits 


753,907,085.71 


Due from reserve agents 




U. S. deposits . . 


8,248,044.74 


Cash items .... 


7,057,267.15 


Dep'tm'ts U. S. dist 




Clearing-house ex- 




officers .... 


353.693-95 


changes 


323,999,862.08 


Bonds borrowed 


I7i79i, 475-00 


Bills of other banks. . 


1,340,088.00 


Notes rediscounted 




Fractional currency . . 


79,923.49 


Bills payable . . 


275,000.00 


Specie 


183,561,084.13 


Reserve for taxes . 


137,698.07 


Legal-tender notes . . 


52,685,572.00 


Other liabilities 




5"% fund with Treasury . 


2,718,042.50 






Due from U. S. Treas- 








ury 

Total .... 


2,474,428.10 


Total . . . 




$1,589,301,591.65 


$1,589,301,591.65 



In the assets, the chief items, it will be observed, are the 
loans and discounts. The only restriction on the amount of 
loans in the case of a national bank is that it cannot lend, 
directly or indirectly, more than one-tenth of its capital to any 
one person. But this restriction does not apply to the discount 
of ordinary commercial paper. Next in order of magnitude 
come the "clearing-house exchanges," or claims on other 
banks which are met through the clearing-house, to be ex- 



538 Credit and Banking. [§ 213 

plained in § 214. The next important items are the " specie," 
or coin and bullion, and the bonds or other easily realizable 
securities in which the bank has invested. Some of the re- 
maining items need explanation. " Overdrafts " represent the 
permission to borrowers to draw upon the bank beyond the 
amountof the deposit to their credit. Prudent banks will natu- 
rally indulge in this practice only very sparingly, and in cases 
of emergency. " Bonds for circulation and deposit " repre- 
sent the government securities which the banks must keep at 
Washington in exchange for the right to issue bank notes or to 
receive government deposits. Formerly only United States 
bonds were received for the latter purpose, but in recent years 
other approved securities have been accepted, a custom now 
sanctioned by the Aldrich act of 1907. This is the meaning 
of the item " other bonds for deposits." The " banking 
house " represents the value of the structure, with the land 
and fixtures, in which the business is conducted. The " real 
estate, etc.," refers to the land and mortgages which the bank 
is sometimes compelled to accept in order to prevent loss on 
debts previously contracted in good faith. The item is so 
small because national banks are forbidden to make loans on 
security of real estate. Mr. Hankey, a former governor of the 
Bank of England, once said that success in banking consisted 
in the ability to distinguish between a note and a mortgage. 
The heading " due from reserve -agents " is blank, because the 
New York banks themselves, as will be explained later, act as 
reserve agents for the rest of the country. " Cash items " are 
miscellaneous assets, like demands on individuals or other 
banks, which are instantly collectible and hence equivalent to 
cash. The " 5 per cent fund with the Treasury " refers to the 
sum kept at Washington for the redemption of the bank notes. 
Among the liabilities, the chief item is the deposits. It will 
be observed to how great an extent these exceed the note 
issues. Next in order come the sums due in the course of 
ordinary business to other banks and trust companies. The 



§ 214] Deposit and Check System. 539 

" capital stock," as we know, is counted as a liability, because 
it is a sum owing to the shareholders, while the deposits and 
bank notes or " national bank circulation " are liabilities to the 
customers. The "surplus fund " is that portion of the profits 
which it is deemed wise to withhold from the stockholders 
and to set aside for use in the business. In the national 
banks one-tenth of the profits each half-year must be added to 
the " surplus fund " until it amounts to twenty percent of the 
capital. In fact, although not in name, the surplus is an addi- 
tion to the capital. It is a permanent fund, in contradistinc- 
tion to the " undivided profits," which represent the sums out 
of which the next dividends are to be paid. In the Bank of 
England the surplus and undivided profits are lumped together 
under the name of the " Rest," as opposed to the paid-up capi- 
tal. " Dividends unpaid " are the dividends which have been 
declared but not yet distributed. The " state bank circulation " 
refers to the notes issued by the banks before they were con- 
verted into national banks, and which have never been pre- 
sented for payment, being either lost or destroyed or in the 
hands of collectors. 

214. The Deposit and Check System. 

The most significant fact in the evolution of credit is the 
growth of modern deposit banking. In the early banks, like 
those of Venice or Amsterdam, the deposits, which were in 
cash and insignificant at best in comparison with the total 
exchanges, were designed primarily to serve as a medium of 
transfer between the actual depositors. In modern times de- 
posits are not alone chiefly credit deposits arising from dis- 
counts, but perform, through the means of checks and deposits, 
a most important service as substitutes for money. The use 
of modern deposits with the check system is everywhere, as 
we have seen, subsequent to that of bank notes. In unde- 
veloped communities, where ordinary business transactions are 
largely of a retail character, the most obvious business of the 



54° Credit and Banking. [§ 214 

bank, as well as its chief source of profit, is to issue to the 
public its own promises to pay in the form of bank notes. It is 
only as the transactions grow in magnitude that commercial 
paper is offered for discount, and it is only as the confidence in 
the bank increases that deposits develop on a large scale. 
Modern deposit banking, with its discount and check system, 
is the highest product of the utilization of credit. 

It is accordingly only in the most advanced commercial 
nations, like England and the United States, that deposits play 
such a great role. In the first half of the nineteenth century, 
when the deposits in the American and English banks were 
small, the banking problem was wellnigh exclusively that of 
note issue. At the present time the bank controversies in 
England almost completely neglect the question of issue, and 
even in the United States there are many banks which do not 
take advantage of their privilege of note issue. On the other 
hand, on the European continent, deposits are still relatively 
insignificant as compared with note issues, and the check 
system is employed to only a slight extent in wholesale transac- 
tions, and scarcely at all in retail trade. It is only in Germany 
that the recent commercial and industrial progress is engen- 
dering a gradual development of deposit banking. 

The striking differences between the banks in Anglo-Saxon 
and other countries are disclosed in the table on the next page. 
This table does not pretend to give the statistics of total bank- 
ing power, for the second item under England and the last 
item under the United States comprise other than banks of 
issue. Nor is the last item quite comparable to the others, 
because under "state banks " are included not only the banks 
proper and the trust companies, but the savings banks with 
deposits of ^3,299,544,601, as against deposits of $8,245,- 
959,307 in the European savings banks. Even excluding 
these items, however, and confining the figures to the banks 
of issue, it will be seen at a glance that whereas circulation 
exceeds deposits on the European continent, the reverse is the 



§ 2 14] Deposit and Check System. 541 



CONDITION OF PRINCIPAL BANKS ON JUNE 30, 1906.1 
In Millions of Dollars. 



Name. 


'0. 
U 


2 



W 


u 

m 
Is 



c 
_o 

'3 

U 


3.t; 

:>s. 


c 
£ °- 




c 
g 


Bank of England. . . . 
Other English Joint-stock 

and Private Banks . . 
Banks of Scotland . . . 
Banks of Ireland .... 
German Reichsbank . . 
Other German Banks of 

issue 

Bank of France .... 
Bank of Russia .... 
Bank of Austria-Hungary . 
Bank of Japan .... 
Other banks of Japan' . . 
Banks of Canada .... 
Banks of Mexico"* . . . 
Banks of Australasia . . 
Banks of Central and South 

America 

United States : 

National Banks . . . 

State Banks 


70.8 

264.S 
45-3 
35-5 
28.9 

15.8 
35-2 
28.3 
41.9 
15.0 

16..5 
93-0 

122.6 
88.0 

128.6 

826.1 
739-' 


187.9 

589.8 
413-9 

235-4 

381.1 

107.1 


213.6 
32.0 

63.8 

104.7 
30-9 


187.9 

872.9" 
3'-i 
15.1 

211. 1 

16. 1 

803.4 

445-9 

299.2 

75-7 

47-4' 

20. 1 

72.2 

143.0'- 

485-9 
145. 1 


146.8 

2.9 

38.1 

30.6 

412.0 

37-S 
90S. 8 
591.0 

376-5 
142 8 
3-9 
70.1 
89.4 
23.6 

29.2 

510.8 


223.2 

3,281.2 
505-3 
269.8 
149.9 

18.1 
136.0 

. I03-9 
31-' 
8.0 
432.6 
606.7 
282.7 
620.4 

373-0 

4,055.9 
8,159.9 


57-1 

53-1 

5-9 
0.5 

277-3 
89.9 


156.8 

2,136.7 
347-6 
213.6 
345-7 

47-6 
255-3 
20S.3 
189.8 

32.5 
501.8 
66S.4 
242.9 

342-2 

4,206.9 
5,656.8 



a Cash at call and short notice. 
J Figures for 1904. 



c Includes paper currency. 
<* Figures for 1905. 



case in England and to a still greater extent in the United States. 
The movement is, moreover, still in process, as will appear 
from the following figures for the national banks of the United 
States for the last three twenty-year periods : 





Deposits. 


Circulation. 


1866 (July 2) 

1886 (June 3) 

1906 (June 18) 


$533,338,174 
1,146,246,911 

4,055.873.637 


$267,798,678 
244,893,097 
510,860,726 



1 Arranged from Report of the Comptroller of the Currency for igob, 
PP- 55. 34, 35, 10, and 370. 



542 Credit and Banking. [§ 214 

The widespread employment of checks has led to special 
arrangements for liquidating the mutual Habilities of the banks 
through the device of clearing houses. These were the out- 
growth of the system of transfers in the early continental banks. 
The London clearing house dates from 1775, ^^^^ °^ New 
York from 1854. The checks deposited in a bank may be 
drawn not only by other depositors in the same bank, but 
by depositors in other banks. In the first case, all that is 
necessary is a transfer on the books of the bank. In the sec- 
ond case, however, the result will be the existence of mutual 
claims of the various banks on one another. To obviate the 
necessity of repeated payments to-and-fro, the banks devised 
an institution in which the reciprocal claims are adjusted or 
" cleared " by being set off against one another, with a payment 
of the uncancelled balances only. Even these payments, more- 
over, are frequently made, not in cash but, as in New York, in 
clearing-house certificates, which represent deposits of gold. 
The clearing-house coin certificates (not to be confused with 
the clearing-house loan certificates described in the next sec- 
tion) are used only for this purpose, and may be counted as 
part of the bank's lawful reserve. Clearing houses are now 
found in every large city, and apply to bank accounts the 
method utilized for clearing securities on the stock-exchanges 
(first introduced in Frankfort in 1867 and adopted in New 
York in 1892) and for clearing railway accounts, as in the 
English railway clearing house. In 1906 the volume of ex- 
changes in the 112 clearing houses of the United States 
amounted to the prodigious figure of $i57,749>328,9i3, of 
which nearly seventy per cent was recorded in the New York 
clearing house alone. This had in 1906 a membership of 55 
banks, with average daily clearings of $342,422,773, the pay- 
ment of cash balances between the banks being only 3.69 
per cent of the aggregate volume of clearings. On the Euro- 
pean continent the clearing houses are both more recent and 
less important, partly because of the centralization of banking, 



§ 2 15] Bank Reserves. 543 

partly because of the smaller use of checks. The central 
banks themselves do a large business in current accounts, 
the transfers and remittances of funds being accomplished 
largely by cancellations through book entry. 

215. Bank Reserves. 

The chief danger to a bank's solvency arises from the ina- 
bility to meet demand obligations. These consist mainly of 
bank notes and of deposits, payment for which may be de- 
manded at any time in cash. The bank must therefore keep 
in reserve in cash, or what is actually equivalent to cash, a sum 
sufficient to pay all probable demands for cash. This is 
called the reserve, and this reserve was the original " bank " 
or pile on which the mediaeval banks did business. It must 
not be confused either with the so-called " reserve " of the 
continental banks in Europe, which is equivalent to what we 
term the " surplus," or with the " reserve-capital," which in 
England is often used to designate the unpaid capital that 
must be supplied in certain emergencies by the shareholders 
of the English joint-stock banks. 

The problem of the reserve may conveniently be discussed 
under the four heads of the character, the composition, the 
amount, and the protection of the reserve. 

(i) Since the demand liabilities are composed of bank notes 
and deposits, the character of the reserves will vary with the 
different proportion of these elements to each other. On 
the European continent the reserve is held primarily against 
the issues ; in England and America, where the deposits far 
outweigh the issues, the question is chiefly one of reserve 
against deposits. We shall accordingly treat in this section 
primarily of the reserve against deposits, leaving the question 
of reserve against note issues for the next chapter. 

In the European countries, where central banks exist, it is 
customary for the smaller banks to keep their reserves as bal- 
ances in the larger institutions, or even to depend for a re- 



544 Credit and Banking. [§215 

serve chiefly on the central bank. Thus the reserve of the 
Bank of England is to a very great extent the real reserve for 
the entire country, a fact that, as Bagehot has pointed out, 
places on it a most serious responsibility. Opposed to this 
system of a single reserve is the American system of the mul- 
tiple reserve, where each bank is supposed to keep its own re- 
serve. Even in the United States, however, the desire to 
employ their funds profitably has led the country banks to 
keep a considerable part of their balances on deposit in the 
larger centres, and especially in New York, a practice recog- 
nized by law, as will be explained later, and heightened by the 
custom of the city banks to pay interest on deposits. This cus- 
tom of paying interest is peculiar to the United States and has 
frequently, but unavailingly, been condemned. 

While this tendency to unified reserves is discernible, the 
centralization is only among the cities, not among the 
banks. In times of crisis, therefore, when the stability of 
the entire structure of credit is imperilled by the imprudence 
of a single bank, resort has been taken to the expedient of 
combined reserves. In virtue of this system, first tried in 
New York in i860 under the stress of the impending Civil 
War, a loan committee of the clearing house was empowered 
to issue to any bank, on pledge of securities, certificates of 
deposit known as clearing-house loan certificates, which 
enabled the weaker banks to expand their loans and which 
were accepted by the others in lieu of cash. The experiment 
was repeated in 1861, 1863, 1864, 1873, 1884, 1890, 1893, 
and 1907, and the certificates were authorized, but not issued, 
in 1895. ^^ i860 and 1873, when the issues were limited to 
a definite sum (ten and twenty millions respectively), the 
equalization of reserves was effected by the provision that the 
stronger banks should turn over a balance to the weaker 
ones. This provision was, however, dropped after 1884, the 
securities deposited with the loan committee sufficing to eifect 
a combination of the reserves. In 1873 the method was 



§ 215] Bank Reserves. 545 

adopted in six more cities, in 1893 in several more, and in 1907 
it spread over the whole country. Although action was often 
taken too late, it frequently succeeded in helping to tide over 
the crisis, and forms an interesting illustration of the advantages, 
in time of panic, of the single or combined reserve over that 
of the multiple reserve. The same principle is applied by the 
Emergency Currency act of 1908 to the new "national cur- 
rency associations," the banks in each of which are jointly 
and severally liable for the security underlying the emergency 
currency authorized by the law. State banks may belong 
to clearing-house associations but not to national currency 
associations. 

(2) Since the reserve is designed to meet immediate obli- 
gations, it must be composed of cash or something that is 
instantly convertible into cash. In a few countries, like the 
United States, the reserve is legally defined ; in most nations 
a certain latitude is permitted, and its composition is some- 
what elastic. Manifestly, however, the chief component of 
the reserve must consist of actual specie. In countries which 
possess a legal-tender paper currency, the paper is sometimes 
counted as a part of the reserve, but as this cannot ordinarily 
be used in the settlement of international debts, there must 
obviously be a reserve of coin even for the paper. Other 
components of the reserve may consist of the clearing-house 
certificates and of demands upon other banks and individuals 
which are immediately realizable, and which in America are 
included under the rubric " cash-items." 

When we leave the actual cash and cash-items, we reach 
more debatable ground. Ordinary or even " gilt-edge " and 
government securities are no substitute for a cash reserve, 
because in times of trouble they may not be salable at any 
price. The same may be said of long time commercial paper, 
which although perhaps perfectly safe, is not instantly convert- 
ible. It is obvious that those banks are in the strongest posi- 
tion which hold in their portfolios short bills that have only a 

35 



54^ Credit and Banking. [§ 215 

few days to run and that have been rediscounted by other 
strong banks. The possession of such paper and of good 
government securities, while not a complete substitute for 
cash, puts the banks in a position where they can within a 
very short time at least replenish their dwindling reserves, and 
thus command or regain the confidence of the community. 
The difference between speedy and instant convert! biUty is one 
of degree, and with prudent management the distinction 
may be minimized. At bottom, however, in order to inspire 
complete confidence and to insure at least relative security, 
cash demands can be met only by cash assets. 

Under the American National Bank system the reserve must 
consist of " lawful money, " by which is meant gold coin and 
bullion, silver dollars, and the gold certificates, silver certifi- 
cates, greenbacks, and treasury notes described in § 207. 
" Lawful money " includes in fact all the forms of paper cur- 
rency except bank notes. But " lawful money " must not be 
confused with " legal-tender " money ; for silver dollars and 
silver and gold certificates are not full legal tender, although 
they are " lawful money " for purposes of the reserve. The 
same is true of the Clearing House certificates and of the cur- 
rency certificates or " United States note certificates " which 
were issued up to 1900. Finally it is provided that there 
may be counted as a part of the legal reserve not only the 
redemption fund of five per cent of its circulation, kept by 
each bank at Washington, but also the so-called " reserve 
agents' balances." This refers to the provision permitting 
ordinary banks to keep three-fifths of their reserve on deposit 
in the reserve cities, and banks in the reserve cities to keep 
one-half of their reserves on deposit in the central reserve 
cities,^ in order to take advantages of the greater opportuni- 

1 There are at present 28 reserve and 3 central reserve cities. The 
laws of 1887 and 1903 permit any city of 200,000 and 25,000 population 
respectively to be made a central reserve or a reserve city, on application 
of three-quarters of its national banks. Chicago and St. Louis have 



§ 215] Bank Reserves. 547 

ties of profitable investment by way of loan in the financial 
centres. 

(3) The proper amount of the reserve is sometimes fixed 
by law. In the United States, national banks in the reserve or 
central reserve cities must keep a reserve of 25 per cent, and 
other banks a reserve of 15 per cent, of their deposits. Since 
1902 this has been interpreted by the government to mean 
only private deposits, the government deposits being deemed 
to be amply protected by the bonds and other securities which 
are turned over in exchange. Owing, however, to the provi- 
sions mentioned at the close of the last paragraph, the actual 
cash reserves held by each bank need be only 6 per cent in 
the country banks and 12^ per cent in the reserve cities. 
This shows at a glance that the real ability of the banks 
throughout the country to weather a financial storm depends 
in last instance on the reserves of the New York banks. The 
Bank of the Netherlands must also keep a specie reserve 
of 40 per cent, but this is applicable to notes as well as 
deposits. Ordinarily, however, it depends on the banks them- 
selves to estimate what Bagehot has well called the " appre- 
hension minimum" — the point below which the community 
will begin to have doubts as to the ability of the bank to main- 
tain specie payments. It was formerly often stated that a 
" safe " reserve is one-third of the liabilities. No such hard 
and fast rule, however, can be laid down, for the conditions 
vary not only from country to country and almost from city to 
city, but also with the changing complexion of business life. A 
reserve which is perfectly adequate at one period may be en- 
tirely insufificient at another ; and the " apprehension mini- 
mum " will itself vary considerably with the character of the 
loans and discounts. In England the reserve of the Bank of 
England, for instance, has varied in the past fifty years from 42 
to 52 per cent. 

been the only places to avail themselves of the privilege, which New 
York enjoyed from the beginning, of a central reserve city. 



548 Credit and Banking. [§ 215 

A statistical study of the bank reserves in most countries 
would show marked fluctuations not only in themselves, but also 
as measured in percentages of liabilities. Of these, perhaps the 
most important are the seasonal fluctuations. In New York, 
for instance, the periodicity is marked. From January to 
April the reserves fall because the farmers need funds to pre- 
pare for planting the crops, and all the out-of-town banks call 
in their balances. After the season of planting and spring 
clothes-buying is over, the funds flow back to New York and 
the reserves remain fairly constant, except during the first week 
in July, when the semi-annual payments of dividends is followed 
by the Fourth of July festivities with their demands for cash. 
Toward the end of the summer more money and credit are 
needed, not only for the fall purchases, but especially for the 
movement of the gigantic crops; and by mid-autumn the re- 
serves are at their lowest ebb. It is not until the beginning of 
November, after the cessation of the autumnal drain, ihat the 
advance is again perceptible. Interesting correlations have 
been worked out by Norton, Palgrave, and others as to the 
ratio of reserves to deposits, and of reserve deviations to call 
discounts, and have been suggested as to the ratio of loan devi- 
ations to foreign-exchange rates. The fluctuations in the re- 
serve are not only periodical or seasonal, but also irregular and 
unpredictable, owing to exceptional domestic demands or inter- 
national complications. Too high a reserve endangers profits ; 
too low a reserve imperils solvency : here, as elsewhere, the 
balance must be struck between cupidity and timidity. 

(4) The simplest method of protecting a dwindling reserve 
is to stop lending. Thus, when the reserves of the national 
banks fall below the legal minimum, the law prohibits them 
from increasing their liabilities by making any loans or dis- 
counts until the reserve has been restored. This, however, is 
an heroic measure, which sometimes defeats its own object. 
For it is precisely in times of monetary stringency that the 
greatest liberality is needed. Many an incipient panic has 



§ 215] 



Bank Reserves. 



549 



been checked by the mere knowledge that the banks were 
ready to extend their loans, on the familiar psychological prin- 
ciple that when a man beheves he can get a thing he is not so 
anxious to secure it at once. The more usual and less drastic 
method, therefore, of protecting the reserve is by a practice 
which is especially suitable in case of a slow and gradual drain, 
namely, by increasing the rate charged. In Europe this is gen- 
erally called the discount rate, and in England the bank rate, 
because the Bank of England is the chief lender ; but in the 
United States, where most of the bank advances take the shape 
of call loans in New York with the interest payable at the ma- 
turity of the loan, it is called the money rate. In countries 
like France, where the banks are at liberty to pay out either 
gold or silver, it is customary to charge a slight premium on 
gold instead of, or at all events prior to, raising the discount 
rate. 

To the general public an increase in the discount rate is 
always unwelcome ; but, as in so many other domains, a sta- 
bility of rates, even with a moderately high level, is preferable 
to the continual fluctuations which unsettle business. In Eng- 
land the bank rate from 1844 to 1900 varied normally from 
two to four per cent, with occasional but increasingly rare vari- 
ations up to ten per cent. The following table gives the rela- 
tive number of days in this entire period on which the 
respective bank rate was charged : 



Bank Rate. 


Number of Days. 


Bank Rate. 


Number of Days. 


Per cent. 


Percentage of Whole. 


Per cent. 


Percentage of Whole. 


2 


16.6 


5i 


1-3 


2* 


146 


6 


43 


3 


239 


6i 


•4 


3i 


8.4 


7 


2.8 


4 


131 


8 


1-3 


4i 


2-3 


9 


•5 


5 


9.8 


10 


•7 



550 Credit and Banking. [§ 216 

In the Reichsbank and the Bank of France the range of va- 
riation was smaller. The maximum was 9 per cent against 10 
per cent in England, and the minimum in Germany was 3 per 
cent ; while a rate of over 7 per cent was reached in only two 
years, and a rate of over 8 per cent only one year in France 
and Germany as against four years in England. Moreover, 
the range of the annual fluctuations is greater in England than 
in France or Germany, having exceeded 3^ per cent only once 
in France and twice in Germany, as against eleven times in 
England ; while there were in France 20 years and in Ger- 
many 9 years, but in England only 3 years, without any fluctu- 
ations at all. The figures, for England, however, are sta- 
bility itself when compared with the New York call rate for 
money, which varies from day to day, and which has several 
times reached a minimum of f of i per cent and a maximum 
of 186 per cent, rates of 10, 15, 20, and 25 per cent not 
being at all uncommon. The reasons for this remarkable fact 
will be discussed in the next chapter. 

It is obvious from what has preceded that successful banking 
depends largely on the management of the reserve. The sol- 
vency of a bank and its capacity to extend credit facilities 
are far more than a matter of concern merely to the stock- 
holders and the immediate customers. The modern bank is, 
so to say, the nerve centre of the business world. A shock to 
its credit at once ramifies throughout the community, and its 
failure may paralyze enterprises that seem to be only remotely 
connected with the particular interests involved. The problem 
of bank reserves is the one of central importance in the 
subject of credit. 

216. Credit and Prices. 

It is from this point of view, therefore, that we must approach 
the question of the influence of credit upon prices. Some 
writers, like Mill, assert that since credit virtually means pur- 



§ 2i6] Credit and Prices. 551 

chasing power, credit acts on prices exactly as money does. 
On the exchanges cotton and wheat futures are no less instru- 
mental in fixing prices than cash sales. So here, instead of 
transacting business with " spot gold," " gold-futures " or 
credit are used. The greater the use of credit, the larger the 
number of purchases, and therefore the higher will be the level 
of prices. 

This theory of the substantial identity of credit and money, 
as purchasing power, overlooks the fact that in a credit opera- 
tion only one-half of the transaction takes place now. Where 
money is used, the transaction is completed at once, — money 
and commodities change hands ; where credit is used, the com- 
modity changes hands now, but the debt incurred must be paid 
in the future. In other words, it is a question not simply of 
purchasing power, but of liquidating power. This considera- 
tion has led writers like Walker to assert that credit has no in- 
fluence at all on prices, because the debts created by such a 
transaction are ultimately cancelled by the credits. 

The truth lies midway between these two positions. If all 
credit operations were absolutely automatic, and if confidence in 
ultimate payment were so complete that actual money were never 
demanded, credit would be a perfect substitute for money, and 
influence prices just as money does. In point of fact, how- 
ever, confidence is never so complete. The banks must always 
keep a certain amount of money on hand to meet possible de- 
mands. The debts, in other words, are never entirely cancelled 
by the credits because, as the future ripens into the present, 
the conditions of the market change. There will always have 
to be a certain balance which a prudent bank must retain. 
This balance measures the real influence of credit on prices. 
It is quite true that credit is purchasing power, and thus 
tends to raise prices; but credit is not to the same extent 
liquidating power. In order to serve as a basis for the credit 
operations a certain quantity of coin must be impounded as a 
reserve. Thus the medium of the entire transaction is in the 



552 Credit and Banking. [§216 

broad sense the credit less the reserve : as purchasing power 
the credit alone operates, as liquidating power the credit must 
be supplemented by the reserve. Since the money so reserved 
is subtracted from what would otherwise enter circulation, there 
is less money disposable for actual cash transactions, or, in other 
words, the price level is lower than it would otherwise be. The 
credit thus tends to raise prices, the reserve to lower prices. 
The reserve, however, is always much smaller than the credit 
transactions, for there would otherwise be no advantage in using 
credit. The net result, therefore, is that credit raises prices to 
a certain point. 

Credit, in other words, although it exerts by no means the 
same amount of influence on price that money does, exerts 
the same kind of influence. The reason that it does not exert 
the same amount of influence is that a portion of its ideal 
efficacy as a substitute for money is lost through the necessity 
of keeping on hand a reserve for which no substitute can be 
employed. The extent of this reserve is a measure of the in- 
completeness of the substitution, and therefore of the degree to 
which credit fails to equal money in affecting price. The differ- 
ence between a " wheat-future " and a credit or a " gold-future " 
is that a reserve is unnecessary in the one case, but requisite in 
the other. 

This also serves to explain why credit cannot increase prices 
indefinitely. It is indeed true that an enhanced use of credit 
marks a period of rising prices. It is precisely in such times, 
however, that prudent bankers will be solicitous about their re- 
serves, and make every effort either to increase their reserves 
or to diminish their loans. Money becomes " tight," the rate 
of discount rises, and the increase of price tends to arrest itself. 
A speculative mania may indeed supervene, and prudence for 
a time be cast to the winds, with a dangerous discrepancy 
between bank liabilities and quick assets. This will, however, 
lead to a crisis, to be discussed in § 225 ; and when the bubble 
of inflated values is inevitably pricked, the price level will again 



§ 2i6] Credit and Prices. 553 

fall. All prices must finally be reduced to the basis of metallic 
money, and with a given quantity of money the oscillations in 
the price level, so far as the effect of credit is concerned, depend 
upon the proportion between the money in circulation and 
that used as a reserve for credit transactions. 



CHAPTER XXXI. 

CREDIT AND CURRENCY. 

217. References. 

W. S. Jevons, Money (1879), chs. xvii, xviii, xxiv ; N. G. Pierson, Prin- 
ciples (1902), part 2, ch. ii; F. A. Walker, Money (1878), part iii; C. F. 
Dunbar, Chapters on the History and Theory of Batiking [7.^ ed., 1901 ), 
chs. v-vi, and jEconomic Essays (ed. by Sprague, 1904) ; J. F. Johnson, 
Money and Currency (1905), chs. vii and xv; D. Kinley, Money (1904), 
ch. xvii; H. White, Money and Banking (2d ed., 1902), bk. iii, chs. ix- 
xvii ; C. A. Conant, A History of Moderft Banks of Issue (4th ed., 1909), 
2iViA Principles of Money and Banking (3ded., 1908) ; F. A. Cleveland, The 
Banks and the Treasury (1905); W. H. Hull (ed.), Practical Problems in 
Banking and Currency (1907) ; Report of the Monetary Comtnission of the 
Indianapolis Convention (1898) ; The Currency Report of the Special Com- 
mittee of the Chamber of Commerce of N^ew York (1906) ; P. M. Warburg, 
Defects and Needs of our Banking Systetti (1907); C. Rozenraad, The In- 
ternational Money Market (Jour. Stat. Soc, LXIII, 1900); T. Straker, 
The Money Market (1904) ; Sir R. Giffen, Essays in Finance, 2d Series 
( 18S6), ch. ii ; Various Reports and Publications of the National Monetary 
Commission (1909-10); K. Wicksell, Geldzins und Guterpreise (1898), 
and The Influence of the Rate of Interest on Prices (Econ. Jour., XVII, 
1907) ; The Currency Problem ^ Addresses at Columbia University (1908). 

Crises. E. D. Jones, Economic Crises (1900) ; T. E. Burton, Finan- 
cial Crises (1902) ; C. Juglar, Brief History of Panics in the United States 
(trans, by Thomm, 1893) ; W. G L. Taylor, The Kinetic Theory of 
Economic Crises (Univ. of Neb. Studies, IV, 1904) ; M. von Tugan- 
Baranowsky, Studien zur Theorie und Geschichte der Handelskrisen in 
Ens^land {igoi) ; J. Lescure, Z>^.f Crises Generates et Periodiques de Stir- 
production (1907) ; brief historical details of American crises in D. R. 
YiQ^^y, Financial History of the United States (Am. Citizen Series),/^^^/^. 

218. Banks of Issue. 

The business of note issue, as we have seen, while a com- 
paratively late stage in the history of banking in general, was 
yet prior to modern deposit banking. It was the profit to be 
derived from issuing their own notes, rather than from dis- 

554 



§ 2i8] Banks of Issue. 555 

counting commercial paper, which was as yet available in very 
inadequate amounts, that led to the great development of Brit- 
ish banks in the eighteenth century and of continental and 
American banks in the nineteenth. 

The issue of bank notes was at first entirely free. It was 
soon seen, however, that the notes served as currency, and the 
question arose as to the nature of the steps to be taken to in- 
sure their safety. This consideration led to four distinct sets 
of problems : ( i ) Should the bank be a public or a private 
institution? (2) Should a particular bank have a monopoly 
of note issue? (3) What should be the character and de- 
nominations of the notes? (4) Should there be any legal 
regulation of the methods of emission? 

(i) Government banks of issue, in the sense of banks whose 
entire capital is furnished by the state and whose management 
is vested in the government, are comparatively rare. The chief 
examples are the Russian, the Swedish, and the Bulgarian bank. 
Far more common are the central banks, whose capital is pro- 
vided in whole or in large part by private individuals, but where 
a considerable degree of control is exercised by the government. 
Of these the chief instance is the Bank of France. 

This was founded in 1 800 as a purely private bank, but re- 
ceived the monopoly of note issue in 1803 and became a pub- 
lic institution in 1806, the management being henceforth vested 
in a governor and two assistants appointed by the state. Al- 
though several independent banks were in the interval accorded 
the privilege of note issue, the monopoly was re-established 
in 1848, and the other banks were converted into branches of 
the central institution. Other important examples of semi- 
public banks with some form of state control, and often of 
state participation in the profits, are the Reichsbank of Ger- 
many, the Austro- Hungarian Bank, the Riksbank of Sweden, 
the Bank of the Netherlands, the National Bank of Belgium, 
of Switzerland, of Roumania, of Servia, of Greece, the Bank of 
Japan, and the National Banks in several of the Central and 



^^6 Credit and Currency [§ 218 

South American states. In all the government and quasi- 
public banks, except the Reichsbank of Germany, and the 
National Bank of Greece (where, however, the monopoly will 
begin in 191 7), there is also a monopoly of note issue, and in 
almost all cases a system of branch banks. In the Bank of 
France these principles were definitely adopted in 1848, in 
Japan in 1887, in Switzerland in 1905. 

The Bank of England is technically a purely private institu- 
tion. But when it was founded in 1694, its stockholders were 
composed of subscribers to a loan to the government, which 
conferred upon it special privileges, and the bank has for a 
long time acted as the fiscal agent of the government. It 
stands out so pre-eminently among the English banks that it 
is practically, although not legally, a quasi- public institution. 
Much the same may be said of the Bank of Spain. 

In the United States, which with Canada is to-day the chief 
example of purely private banking, there have been govern- 
ment banks, both national and state, but never with any 
monopoly of issue. The first and second Banks of the United 
States, which existed from 1791 to 181 1 and from 18 16 to 
1836, were private banks, one-fifth of the capital, however, be- 
ing subscribed by the government, which was represented on 
the board and which utilized the banks as fiscal agent. In 
the case of the states, many commonwealths in the South and 
Middle West established, between 1820 and 1840, banks man- 
aged by state officials, in which the capital was subscribed either 
in whole or in large part by the state government, sometimes 
in cash, but more often in public stock of doubtful excellence. 
Such " state " or " commonwealth " banks existed in Kentucky, 
Tennessee, Missouri, Delaware, Alabama, the Carolinas, Geor- 
gia, Florida, Mississippi, Louisiana, Vermont, Illinois, Ohio, 
and Indiana, almost all of which, with the notable exception 
of the last two, being recklessly managed and coming to a 
disastrous end. 

(2) So far as the right of note issue is concerned, there are 



§ 2i8] Banks of Issue. ^^y 

three systems : (a) monopoly, or complete centralization of 
emission ; (<5) the mixed system, with the privilege of issue 
accorded to only a small number of banks, and often with the 
virtual preponderance of a single bank ; and (c) decentraliza- 
tion of issue, or the existence of a large number of independent 
banks. 

Monopoly of issue is ordinarily confined to the government 
or quasi-public banks mentioned above. But it is also some- 
times accorded to a purely private bank, as in the case of the 
Imperial Ottoman Bank in Turkey at present, or of the Bank 
of Scotland during the two decades after its inception in 
1695. The chief examples of the mixed system are at 
present England and Germany. 

The Bank of England received the right of note issue in 
1697, three years after its foundation, with the understanding 
that no other bank should be authorized. This did not, how- 
ever, mean a monopoly of banking. For not only was " bank " 
used in the sense of bank of issue, thus in no wise preventing 
other classes of banking transactions by outsiders, but it did 
not apply, as was explicitly stated in 1707, to the issue of notes 
by individuals or partnerships of six members or less. The 
London private bankers discontinued their note issues before 
the end of the eighteenth century, but the country bank notes 
have persisted to this day, though their competition was some- 
what reduced by the general prohibition, in 1775, of notes 
under ;£i, and in 1777 of notes under ;^5. In 1790 there 
were .about 350 issue banks, the majority of which failed 
during the crisis of the French wars. In 1826 the right 
of note issue was granted to joint-stock companies of more 
than six persons, when over 65 miles from London. The 
undue use made of this permission led to a revulsion, which 
culminated in 1844, when the charter of the Bank of England 
was renewed. This law, known as Peel's Act, forbade the crea- 
tion of any more joint-stock banks of issue, and provided that 
when any of the existing banks (which were, moreover, pro- 



^^S Credit and Currency. [§ 218 

hibited from increasing their circulation) should abandon its 
right of issue, the Bank of England might add to its authorized 
issue two-thirds of the sums thus lapsed or withdrawn. In 
1844 the 279 banks (207 private and 72 joint-stock) had an 
authorized issue of ;^8, 63 1,647, ^s against somewhat more 
than fourteen millions of the Bank of England ; by the close 
of 1909 there remained only 23 banks (12 private and 11 joint 
stock), with an authorized issue of ;^i, 204,490, as against 
;^i 8,450,000 of the Bank of England. 

In Germany there was great confusion until 1875, at which 
time there were 32 banks of issue in addition to the reor- 
ganized Reichsbank. The issue of notes by these private or 
independent banks was subject to numerous restrictions, and it 
was provided, as in England, that when any of them surren- 
dered their right of issue, the whole (not f ) of the equivalent 
sums were to be added to the authorized uncovered issue of 
the Reichsbank. In 1875 the 32 banks had the right of 
issuing 135 million marks of notes (as against 250 millions 
of the Reichsbank) over and above the coin reserve ; by 1906 
all but four of the banks had abandoned their note issues as 
unprofitable, the four still possessing the right of issuing 
68,777,000 marks of uncovered notes as against 472,829,000 
marks allotted to the Reichsbank as a result partly of the 
transfers from the other banks, partly of additional legislation. 
Thus Germany, like England, is on the high road toward a 
centralization of note issue. 

A somewhat lesser degree of centralization is found in Ire- 
land with its six banks of issue (of which the Bank of Ireland 
alone has 60 branches) ; in Scotland with its ten banks (each 
with numerous branches) ; and in Italy with its three banks, 
of which the Bank of Italy is easily the most prominent. 

The chief example of decentralization is that of the United 
States; At the outset, however, the privilege of note issue 
was granted only by special charter. Passing by a few short- 
lived colonial experiments, banking began with the Bank of 



§ 2i8] Banks of Issue. 559 

North America in Philadelphia in 1781, the Massachusetts 
Bank in 1784, and the Bank of New York in 179 1. In New 
York, as elsewhere during the first third of the nineteenth 
century, charters were often granted as political favors, but 
apart from the Bank of the United States there was nothing 
approaching a system of centralization. The democratic 
wave which swept over the country during the Jacksonian era 
resulted in the replacement of the charter method by the Free 
Banking system. Under this scheme, which originated in 
New York in 1838, any association or number of individuals 
over five could freely issue bank notes on complying with certain 
formalities to be mentioned in § 221. As a consequence, there 
were at the outbreak of the Civil War in 1861 over 1600 state 
banks of issue of every conceivable variety. When the na- 
tional banks were created, with facilities for the state banks to 
enter the system, the privilege of note issue was taken away 
from the state banks by the imposition of a ten per cent tax, 
applicable in 1866. The number of national banks has grown 
until, on July 15, 1908, there were in operation 6,824 as op- 
posed to 18,176 state and private banks and loan and trust 
companies. While there has been in recent years a well- 
defined movement toward consolidation of banking interests, 
especially in the financial centres like New York, the prohibi- 
tion of branch banking on the part of the national banks has 
perpetuated a system of the most extreme decentralization, 
whose drawbacks have gradually come in many respects to 
outweigh its possible original advantages. In Canada and 
Mexico there is also a system of independent banks, but with 
the important difference that branch banks are permitted. 
(3) The third problem mentioned above refers to the char- 
acter and denomination of bank notes. Since bank notes are 
simply promissory notes, the government does not ordinarily 
invest them with legal-tender quality. Nor is this necessary, as 
the acceptability of the notes depends primarily on the meas- 
ures taken to insure the solvency of the bank and the fre- 



560 Credit and Currency. [§ 218 

quent redemption of the notes. In some cases, however, 
the government signifies its willingness to receive the notes 
for public dues, as in Germany or the United States. Here 
bank notes are receivable for any payments to the govern- 
ment except for import duties, and for payments by the gov- 
ernment except for interest on the public debt. In a few 
countries bank notes are even legal tender, as is the case in 
the Bank of England, the Bank of France, and since 1909 the 
German Reichsbank. In England, however, this applies only 
as long as the notes are kept convertible. 

The acceptance by the banks of each other's notes at par is 
sometimes a matter of mutual arrangement, as in Scotland or 
formerly under the Suffolk Bank system to be explained be- 
low. It is, however, occasionally prescribed by law, as in 
Germany and Italy, although subject to some slight geographi- 
cal restrictions. In the United States notes of any national 
bank must be accepted by all the others without any restric- 
tion but cannot, as in Germany, be counted as a part of the 
lawful reserve. In our system the obvious danger is that 
banks would otherwise exchange notes with each other, 
and thus have a nominal reserve without holding any cash 
at all. 

The denominations of the notes depends partly on the de- 
sire of the government to minimize the use of coin, and 
partly on the existence of other paper money. When the 
notes are irredeemable legal tender, and thus virtually fiat 
money, the minimum will naturally be smaller. In the Bank 
of England it was originally ;^20, but since 1793;^ 10, and 
since 1829 ^5. During the period of bank restriction it was 
as low as jP^\. In France and Italy it is 50 francs ($10); in 
Germany it was until 1906 100 marks, but it is now 20 marks 
(^5), as is the case also in Scotland with the ^i notes. On 
the other hand, in Russia and Japan it is 5 rubles or yen ($21), 
and in Scandinavia 5 kroner (^1.35). In the United States the 
minimum in the case of the national bank notes was orig- 



§ 219] Regulation of Note Issue. 561 

inally ^i, with the proviso that only one-sixth of the total 
issue might be in denominations under ;^5, and that none 
should be issued below that figure after the resumption of 
specie payments. In 1900 it was further provided that not 
more than one-third of the total issues should be as low as $5. 
The banks prefer the larger issues because they are not re- 
deemed so soon, and in 1905 only 13 per cent of the total 
issues were in denominations of $5. As the people had be- 
come habituated to the actual currency of paper, and felt a 
need of one and two dollar notes, which was not adequately 
filled by the existing silver certificates, the act of 1907 autho- 
rized the issue of the greenbacks in the small denominations, 
and also directed the issue of new ^lo gold certificates to 
set free similar denominations of silver certificates and green- 
backs for which the smaller denominations might then be 
substituted. 

Whether the banks are government or private, whether there 
is a system of monopoly or decentralization, whether the notes 
are legal tender and in small denominations or not, we are 
confronted in every case by the final problem — that of note 
regulation. This we shall now proceed to discuss. 

219. Regulation of Note Issue. 

The two theories as to the regulation of note issues arose at 
the time of the controversies preceding the English Bank act 
of 1844, They are known as the currency and the banking 
principle, respectively. The currency principle, first so-called 
by Mr. George W. Norman in 1840, was advocated not only 
by him, but by Lord Overstone and Colonel Torrens, and was 
accepted by Sir Robert Peel. The banking principle was 
championed by Messrs. Tooke, FuUarton, Wilson, and Gilbart, 
and was accepted in part by John Stuart Mill. The currency 
principle states that whereas in the case of a metallic currency 
all the specie cannot be exported, for the reason that, as the coin 

36 



562 Credit and Currency. [§219 

goes out, prices will fall, exports increase and money again flow- 
in, on the other hand an issue of bank notes may expel the 
specie because the total volume of money, now composed of coin 
and notes, will be at least no smaller than before. On the con- 
trary, the banks, it is alleged, will put into circulation more notes 
than the specie displaced, and there will soon be a premium on 
gold. Hence, to prevent the notes from becoming redundant 
and thus ultimately inconvertible, safeguards must be adopted 
against overissue. 

The weakness of this reasoning lies chiefly in overlooking the 
fact that bank deposits act precisely like bank notes. The ad- 
vocates of the banking principle pointed out that if the banks 
could affect prices and the stock of coin by increasing their 
note issue, they could do the same by expanding their deposits. 
A restriction on note issue would therefore in itself be futile. 
In point of fact the banking theorists denied that inflation was 
possible in either case, since both notes and deposits are issued 
in response to an actual demand. As long as bank paper is 
convertible, they claimed that there can be no redundancy, be- 
cause if there were an overissue, that is, an issue greater than 
the real demand, the notes would at once automatically return 
to the bank. Hence, so long as the ordinary principles of good 
banking are observed, no safeguards are needed. 

The truth again lies in the middle. The banking theory was 
undoubtedly correct in emphasizing the analogy between notes 
and deposits, and in stating that the aggregate of currency is not 
likely to be permanently increased by an issue of notes. It 
failed, however, to observe that as the bank notes are returned 
to the bank, specie may be paid out in exchange, and that 
while the aggregate circulation may remain the same, its pro- 
portions may be altered. Even though the redundant notes 
automatically return to the bank, it is precisely this return which 
may exhaust the coin reserve and thus jeopardize the entire 
issue. From the point of view of bank solvency a perilous dis- 
crepancy between reserve and liabilities may be brought about 



§ 219] Regulation of Note Issue. 563 

by a diminution of the reserve as well as by an increase of the 
liabilities. 

As a consequence, all nations impose some restrictions on 
bank issues which affect either the amount of emission, the 
nature of the reserve, or the character of the security. They 
are of six chief kinds : the maximum amount, the fixed re- 
serve, the variable reserve, the emergency circulation, the safety 
fund, and the bond-deposit systems.^ 

(i) A good example of the first method is that employed 
in France. Apart from the requirement that all the paper dis- 
counted must be three-name paper, the only restriction placed 
upon the Bank of France is the fixing of the issues at a maxi- 
mum, which was originally set in 1870, at 1800 million francs. 
This method, however, reverses the true principle, restricting 
what should be left free and leaving free what should be re- 
stricted. As long as the reserve increases with the note issue 
there is no reason why an absolute maximum should be estab- 
lished. In France, however, the maximum is periodically in- 
creased, and kept well above all possible demands, so that it 
does not really act as a rigid check to the desirable elasticity. 
Thus the maximum was raised in 1872 to 3200, in 1883 to 
3500, in 1893 to 4000, in 1900 to 5000, and in 1906 to 5800 
millions. 

(2) The fixed percentage is typified in Switzerland and 
the Netherlands. The law of 1905 authorizing the new Na- 
tional Bank of Switzerland requires 40 per cent of the circula- 
tion to be kept as a specie reserve. The same is true in the 
Netherlands, with the exception that the reserve applies to 
deposits as well as to note issues, and that the restriction may 

1 Jevons; Money, 218-235, mentions fifteen different methods : the 
simple deposit, the partial deposit, the minimum reserve, the proportional 
reserve, the maximum issue, the elastic limit, the documentary reserve, the 
real property reserve, the foreign exchanges, the free issue, the gold par, 
the revenue payments, the deferred convertibility, and the paper money 
method. They may, however, be substantially reduced to those men- 
tioned in the text. 



564 Credit and Currency. [§219 

be suspended in case of emergency. The Dutch method is 
in accord with the sound principle that deposits and notes 
are really equivalent forms of credit. 

(3) The variable percentage is best illustrated by England. 
Here the regulation takes the form of a fixed limit of uncov- 
ered note issues, with a specie equivalent for additional issues. 
The act of 1844 divided the Bank of England into the Issue 
and the Banking Department, to the former being exclusively 
delegated the management of the bank notes, while the latter 
carries on all the other forms of bank business. The Issue 
Department is allowed to emit notes only against a corre- 
sponding amount of government securities, gold, or bullion. 
The act directed the Banking Department to deposit with the 
Issue Department ;^i4,ooo,ooo of securities (of which eleven 
millions consisted of the government debt held by the bank) ; 
and for every pound of notes above that sum the Issue Depart- 
ment must hold coin or bullion. As the amount of notes out- 
standing during the few years preceding 1844 was always 
slightly above this limit, this was supposed practically to insure 
the immediate redemption in coin of any notes that could by 
any possibility be presented for payment. The business of the 
Issue Department is thus limited to exchanging notes for coin or 
vice versa, and if the Banking Department desires any notes, 
it, like any one else, must deposit specie. Under the provision 
referred to above, the amount of securities (and hence of un- 
covered notes) held by the Issue Department might be aug- 
mented by two-thirds of the lapsed country note issues, and 
the uncovered notes have accordingly grown to ;^i 8,450,000 
by 1909. The total circulation during the past two decades 
has varied from about 35 to 60 millions, making the uncovered 
issues from a half to a third of the whole. 

The chief objection to the English system is that it purchases 
safety at the cost of an insufificient elasticity. In fact, on three 
separate occasions, namely 1847, 1857, and 1866, it was found 
necessary to suspend the act and to permit the issue of notes 



§ 2 19] Regulation of Note Issue. 565 

on government securities. Of more recent years the short- 
comings of the system have been reduced not only by the 
great growth in the actual specie reserve, but also by the in- 
creased importance of deposit as contrasted with note currency. 
The English system has been followed, in part at least, by Nor- 
way and Russia. 

(4) The system of emergency circulation was first tried in 
Germany, in order to provide the flexibility lacking in the Eng- 
lish system, without sacrificing its safety. The Reichsbank is 
empowered to issue a so-called contingent circulation, which 
for the reasons mentioned on page 558 has grown from the 
original Hmit of 250 million marks in 1875 to 472 millions in 
1907, subject to the provision that one-third of the issue be 
covered by cash (coin, bullion, treasury notes, and notes of the 
other four banks) and the remaining two-thirds by discounted 
bills having not more than three months to run and bearing at 
least two names. When the bank desires to increase its notes 
beyond the contingent circulation plus the one-third cash re- 
serve, it may emit a so-called excess issue on the payment of 
a tax of five per cent per annum, payable weekly, which in- 
sures a withdrawal of the notes as soon as the emergency dis- 
appears. The chief criticism that can be urged against this 
scheme is the calculation of the excess issue according to the 
" contingent" rather than the cash reserve. For a large issue 
with over 50 per cent reserve may be taxed, while a smaller 
issue with only one-third reserve, and therefore far less safe, may 
go untaxed because not exceeding the " contingent." The 
German system has, however, on the whole worked satisfactorily, 
and has been adopted by Austria-Hungary in 1888, by Japan 
in 1889, and, in a somewhat modified form, by Italy in 1900. 

The four methods thus far discussed involve some form of 
asset currency, /. <?., the system of issuing notes on the basis of 
banking assets in which a coin reserve plays a certain role. A 
radically different system is found in the United States and 
will now be described. 



566 Credit and Currency. [§ 220 

220. Early American Systems. 

The American banks before the Civil War were to an over- 
whelming degree banks of issue rather than of discomit, and 
may be classed under four systems : general asset banking, the 
Suffolk system, the safety-fund system, and the bond-deposit 
system. 

(i) The issue of notes on general assets, with but few, if 
any, restrictions, was at first the usual practice. In both the 
first and the second Banks of the United States the only restric- 
tion was the limitation of the notes to the amount of capital. 
In many of the state banks even this restriction was lacking, 
and but slight effort was made either to provide a sufficient 
working capital or to insure the convertibility of the notes. 
The wave of ill-managed banks spread from New England to 
the South and West, until they culminated in the " wild-cat " 
and " coon-box " banks of the frontier. From 1837 on, when 
a distinct improvement began, there was, however, the greatest 
variety. Not only did legislation differ from state to state, 
ranging from the rigid requirements of Louisiana, as to the 
character of the assets and the immediate redemption of the 
notes, to the almost complete freedom in some of the border 
states, but in the banks themselves was to be found every 
degree of diversity from the loosest to the best methods of 
selecting the assets and protecting the notes. 

(2) The Suffolk Bank system was in effect a method to se- 
cure the immediate redemption of the notes and to protect 
the sound currency from being driven out by the inferior is- 
sues. It rested on the significant distinction between ultimate 
security and immediate convertibility. Bank notes may enjoy 
a complete protection as to final payment ; but the test of their 
excellence and serviceabihty is the provision for their instant 
redemption in specie. The Boston banks found that they 
could not keep their notes in circulation, as they were being 
crowded out by the country bank issues which were received 



§ 22o] Early American Systems. 567 

by them only at a discount. For the Boston notes, being alone 
received at par by the other city banks, were hoarded by those 
having payments tcJ make to the banks, and the " foreign " 
issues alone remained in circulation. In order, therefore, to 
maintain the country issues at par, the Suffolk Bank was incor- 
porated in 18 1 8 and the system was perfected in 1824. The 
Suffolk Bank agreed to redeem at par in specie the notes of any 
bank which kept on permanent deposit with it the sum of at 
least ^2000 plus an amount sufficient to redeem the notes, 
charging interest only on the excess, but agreeing to credit to 
any such bank the bills of any other bank in good standing 
that it might send in. The country banks, which at first strenu- 
ously resisted, soon found that, unless they consented, their 
notes would suffer in good repute and would be sent home for 
redemption. As a result the Suffolk Bank acted as a kind of 
clearing-house, each bank in the system being allowed to pay 
out only its own notes and sending to the Suffolk Bank weekly 
as an offset to the redemption of its own notes the bills of the 
other banks received by it in the course of business. In this 
way all the notes were kept at par, and there was little need of 
actual cash redemption. The system spread until it included 
most of the New England banks, whose currency as a conse- 
quence enjoyed a singularly high reputation. 

(3) The Safety Fund plan was initiated by New York in 
1829. Each bank in the system was obligated to pay to the 
state treasurer an annual sum equal to one-half of one per cent 
of its capital, until it reached three per cent. This " Bank- 
fund " was to be applied to the redemption of the notes of any 
insolvent bank, after the other assets had been exhausted, the 
stronger institutions thus coming to the aid of the weaker ones. 
Unfortunately the fund was made responsible for the other lia- 
bihties as well, and it was not until 1S42, after several failures, 
that the fund was restricted to the notes. This was, however, 
too late, and the redemption of the notes was suspended for a 
time, the fund being subsequently replenished by mortgaging 



568 Credit and Currency. [§ 220 

future payments. In 1843, in order to prevent the emission 
by any bank of more than its maximum allotment, it was pro- 
vided that all notes should be printed by the comptroller, and 
in 1846 they were given a first lien on the assets of insolvent 
banks. As the charters of the banks belonging to the system 
expired, the system itself melted away. Had the fund, how- 
ever, been applied from the outset only to notes, it would have 
been ample. In fact a safety fund of less than one-quarter of 
one per cent of the capital, or about three-eighths of one per 
cent of the circulation, would have been adequate to redeem 
the issues of every bank that failed in New York from 1829 to 
1865. The safety fund was also utiHzed in Ohio, Iowa, and 
Vermont, and exists since 1890 as a valued feature of the 
excellent Canadian system, where it amounts to five per cent 
of the circulation, and where the notes of insolvent banks bear 
six per cent interest until redeemed, making them eagerly 
sought after by the other banks and preventing depreciation. 

(4) The Bond Deposit system also originated in New York. 
Under the Free Banking Law of 1838, any bank might issue 
notes, to be provided by the state comptroller, on depositing 
with him an equivalent amount of stock of the United States, 
of New York, or of any other state approved by him. Un- 
fortunately, bonds and mortgages on real estate worth double 
the mortgage might also be deposited, with a result that the 
notes of insolvent banks which had made such deposits were 
redeemed in 1841-1842 at a discount of 25 per cent. The 
deposits were subsequently limited to Federal and New York 
stock, and the security of the notes was thereafter unquestioned. 
But in many other states which adopted the scheme, these 
safeguards were not observed, and the security was frequently 
worthless. Moreover, even when the security was ample, there 
was, as we shall see, no elasticity. 

The result of these various methods was, in 1861, a hetero- 
geneous jumble of good, bad, and indifferent banks, with notes 
lacking in uniformity and of all degrees of acceptability. 



§ 22i] National Banks. 569 

221. The National Banks. 

The National Bank system was devised primarily to secure 
a market for the war debt, and secondarily to provide a uniform 
currency. The former object was attained by adopting the 
bond-deposit system of New York, the latter by taxing the 
state bank notes out of existence. Under the act of 1863, 
perfected in 1864, any bank with a capital of at least $50,000 
could secure, from the Comptroller of the Currency, bank- 
notes not exceeding the amount of its capital stock and equal 
to 90 per cent of the market value of the United States bonds 
deposited with him. The banks were held to redeem these 
notes, not only over their own counters, but at selected agen- 
cies in the principal centres, known as reserve cities. To pro- 
vide for such redemption the banks were to keep as a reserve 
in lawful money 15 per cent or, in case of the reserve-city 
banks, 25 per cent of the circulation and deposits. On failure 
of a bank to redeem its notes, the government was to do so, 
having ample security, not only in the bonds deposited, but 
also in the possession of a first lien upon all the assets of the 
bank and in the personal liability of the stockholders. 

Originally the total issues were restricted to $300,000,000, 
and every bank was compelled to deposit bonds amounting to 
at least one-third of its capital, and not less than $30,000 in 
any case. For various reasons the West and South had not 
secured their due proportions of note issues, and the act of 
1865 accordingly sought to favor the smaller banks by restrict- 
ing the circulation of the larger banks to a sum from 60 to 80 
per cent of the capital, and by apportioning one-half of the 
circulation to the various states according to actual banking 
capital, and the other half according to population. The rule 
was, however, disregarded ; so that in 1870, when the maximum 
limit was enlarged by $54,000,000, the increase was to be 
allotted preferably to the localities having less than their 
quota, and the amount permitted to any bank was restricted 



570 Credit and Currency. [§ 221 

to ^500,000. In 1875, finally, all restrictions on the amount 
or apportionment of bank issues were swept away by the 
Resumption Act. The law of 1874 had in the mean time 
made two important changes. It permitted the banks volun- 
tarily to reduce their circulation up to a total of ^55,000,000 
(which it was supposed would be allotted to the smaller 
banks), and provided that no bank should reduce its bonds 
on deposit below ^50,000 (instead of one-third of its cap- 
ital). Secondly, it substituted for the redemption agencies 
in the reserve cities a system of government redemption, each 
bank being now obligated to keep in lawful money a redemp- 
tion fund of 5 per cent of its circulation in the Treasury at 
Washington, which became the sole redemption agency. The 
required reserve was at the same time made applicable 
henceforth only to circulation, instead of to deposits and 
circulation conjoined. 

The act of 1882, rechartering the national banks for 
another twenty years, provided that banks with a circula- 
tion of ^150,000 or less need not deposit in bonds more 
than one-fourth of their capital, thus reducing the minimum 
to ^12,500. The total amount by which all the banks might 
reduce their circulation was limited to three millions a month, 
and a bank reducing its circulation was prohibited from again 
increasing it within six months. These last provisions were 
unfortunate, for they emphasized the existing inflexibility of 
the system, not only by setting a rigid minimum limit but by 
rendering impossible any immediate rebound. 

Three points now became evident. In the first place, the 
national-bank circulation, instead of furnishing the major part 
of the paper currency, as had been originally contemplated, 
constituted only a small, and in general diminishing, propor- 
tion. The highest point reached was 360 milhons in 1882, 
which was but little more than the outstanding greenbacks, 
not to speak of the gold and silver certificates. From 1882 
the circulation dechned, owing to the dwindling of the public 



§ 22i] National Banks. 571 

debt and the increasing price of bonds, which it now became 
more profitable for the banks to sell, until in 1891 it was only 
171 millions. Many of the largest banks in New York issued, 
and still issue, no notes at all, making their chief profits on de- 
posits. In the second place, a comparison of the fluctuations 
in circulation, as shown in the chart on page 516, with the oscil- 
lations in the price of bonds convinced many that some of the 
banks were utilizing the bond-deposit provision to speculate in 
the bond market rather than to provide a currency. Thirdly, 
the restriction of banks to those with a minimum capital of 
:^5 0,000, coupled with the absence of any provision for branches, 
prevented adequate banking facilities in the rural districts and 
led to a great spread of state banks, often with a capital as low 
as ^10,000 or $5000. 

The act of 1900 accordingly attempted to remedy these 
evils. The minimum capital was lowered to $25,000, the tax 
on circulation was reduced from i per cent to one-half of i per 
cent, and all banks were now allowed to issue notes up to 100 
per cent (in lieu of 90 per cent) of the bonds deposited. As 
a consequence, the circulation gradually rose from 242 millions 
in 1S99 to 688 millions in June, 1909 ; but even at that figure 
it formed only a small proportion of the entire paper currency. 
In 1907 another slight improvement was added by the pro- 
vision permitting the banks to reduce their circulation by a 
total amount not exceeding nine (instead of the former three) 
millions a month. 

The defects of the National Bank system may thus be 
summed up as follows : 

(i) There is no adequate provision for banking facilities in 
the smaller places. Branch banks are not permitted, and the 
state banks of discount do not furnish a suitable substitute for 
the assistance that might be afforded by note issues. 

(2) Since by far the greater part of the public debt is held 
by the national banks as a deposit for note issue, the govern- 
ment bonds acquire an artificial value, the virtual dependence 



572 Credit and Currency. [§ 222 

of the public credit on the national banks militating against 
both the payment of the debt and the substitution of some 
better system of security for note issue. 

(3) The ultimate redemption of the notes is indeed as- 
sured, but there is no adequate provision for immediate and 
daily redemption. The 5 per cent redemption fund at Wash- 
ington serves only to replace the soiled and mutilated notes, 
and accomplishes even that object only imperfectly. Not 
only is the expense great, but the average life of the outstand- 
ing notes is about two years, whereas it was only about five 
weeks under the Suffolk Bank system, and is correspondingly 
short in Canada and Europe. 

(4) The principal defect is the complete lack of elasticity. 
In the face of the constant fluctuations in the public demand 
for credit facilities, the changes in the price of bonds may 
induce the bank to sell rather than to buy bonds when the 
community needs more money ; and if by any chance more 
notes have been issued, the banks are prohibited, when the 
need for them is past, from withdrawing them at will. Thus at 
both ends there is a lack of flexibility, necessitating the trans- 
mission of actual cash to and from the communities in the 
West and South, causing violent fluctuations in the " money- 
rate " and upheavals in the stock-market, and involving con- 
stant interference by the government in what ought to be an 
automatically regulated mechanism. Were the demand for 
credit not met to an overwhelming degree by deposit currency 
rather than bank notes, the situation would long ago have be- 
come intolerable. As it is, the embarrassments are great, and 
the spasmodic variations of the money rate in Wall Street are, 
as we have seen, utterly without parallel elsewhere. 

222. The Money Rate. 

Fluctuations in the money rate are due to three causes, — 
the general rate of interest, the level of prices, and the state of 
the money market in the narrower sense. 



§ 222] Money Rate. 573 

(i) The general interest rate is, as we know, the payment 
for the use not of money but of capital as a whole, and varies 
with the marginal productivity of capital (§ 169). The " money 
rate " or " discount rate " in the long run follows the general 
rate of interest, for a relative plethora or dearth of capital ulti- 
mately finds its way to the lending centres. 

We must be careful, however, not to confuse the demand 
for money in general with the " demand for money " in the 
Wall Street sense. The demand for money in general is, as 
we know, reflected in the price level, because money is needed 
primarily as a medium of exchange. But the demand for 
"money," as reflected in the "money rate," is primarily a de- 
mand for loanable funds or capital. A demand for capital is 
not necessarily a demand for money. The borrower of capi- 
tal may indeed get it in the shape of money, but the mere 
fact that one man rather than another desires to control a cer- 
tain quantity of capital does not alter the total volume of 
exchanges or the community's need for money. A given 
quantity of money, and the resulting price level so far as it 
depends on this tact, may be the same whether the general 
interest rate is high or low. The demand for capital is re- 
flected in the general rate of interest, the demand for money 
in the general level of prices. Although, as we shall see 
below, there is a minor correlation between interest rates and 
prices, yet so far as prices are primarily dependent on the 
other factors which influence the value of money, there may 
be high interest with low prices, or low interest with high 
prices. If, indeed, "times are good," and everybody is 
expanding his output, general interest may rise because of 
the increased demand for capital, and prices may rise because 
of the increased use of credit and the greater rapidity of cir- 
culation ; but the one is not the result of the other. Interest 
depends on capital ; prices depend on money : interest de- 
pends at bottom on the demand for the creation of new 
wealth ; prices depend on the exchange of existing wealth. 



574 Credit and Currency. [§ 222 

So far, therefore, as the fundamental cause of variation in 
the " money rate " is the alteration in the general rate of in- 
terest as contingent upon the marginal productivity of capital 
in its broadest sense, the " money rate " depends on forces 
entirely distinct from the demand or supply of money. But 
while the actually existing price level cannot affect the rate 
of interest, the latter maybe modified by changes in the price 
level. We thus come to the second point. 

(2) Alterations in the price level, that is, an appreciation or 
depreciation of money, may exert a temporary change in the rate 
of interest. If a man borrows ^1000 during a period of falling 
prices, he will really repay at the expiration of the loan period 
more than he received. That is, in order to return the nom- 
inally identical sum of ^1000 he must sell more goods or work 
more days. As interest is really paid for capital, not money, 
and as the prices of commodities have fallen, he is substan- 
tially paying back more capital or commodities than he bor- 
rowed. If, therefore, he is able to foresee the falling prices, 
the borrower will insist on securing a compensation by a re- 
duction in the rate of interest, and the lenders will be forced 
by competition to grant it. If competition and foresight are 
perfect on both sides, the fall in prices would be exactly offset 
by the fall in interest, or mathematically speaking and allowing 
for the compounding of interest, the rate of interest would be 
lowered by shghtly more than the rate of appreciation of 
money.. In the same way, in the case of rising prices, the 
rate of interest would be raised by a little more than the rate 
of the depreciation of money. It is precisely because fore- 
sight and competition are not perfect that the interest rate is 
never exactly adjusted to this change in the purchasing power of 
money, and that variations in the price level are often attended 
by periods of inflation and depression in the business world. 

Changes in the price level thus affect the rate of interest, 
and the "rate of money" in the Wall Street sense is hence 
partly dependent on the " value of money " in the broader 



§ 222] Money Rate. ^j^ 

sense. But it must not be overlooked that these changes are 
merely incident to a period of readjustment of prices, and that 
as soon as a new relatively permanent price level is again 
reached, this factor falls away. Inasmuch, however, as changes 
in the price level are very frequent, the rate of interest will to 
that extent oscillate about the central point which itself alters 
only with the general supply of and demand for capital. 

Since this change in interest is connected with an apprecia- 
tion or depreciation of money, it is clear that the longer the 
period which the loan has to run, the greater will be its influ- 
ence. It is, for instance, an interesting fact that in a period of 
rising prices, as from 1896 to 1907, the rate on "time money " 
in Wall Street tends to be higher than on "call money." But this 
influence is felt, although in a lesser degree, on call money also. 

While changes in the price level thus influence the rate of 
interest, it must not be forgotten that on the other hand changes 
in the rate of interest itself affect the general price level. This 
is due chiefly to the influence of credit. A fall in the rate of 
interest frequently tends to raise the price level. It might be 
objected that, as Tooke thought, since interest is one of the 
elements in cost, low interest means low prices. It must, how- 
ever, be remembered that when we speak of changes, a lower- 
ing of the interest rate, and therefore an increase of credit 
facilities, is apt to stimulate production, to enhance business 
activity and to usher in a period of rising prices. Other things 
remaining the same, indeed, low interest implies low cost of 
production and low prices. But when interest is lowered, other 
things rarely remain the same ; and it is precisely this frequent 
concomitant in the " other things " that often causes low in- 
terest to be associated with higher prices. Such considerations 
as to the relation of interest to prices reinforce the conclusion 
reached above (§ 193), that while a change in the supply of 
money is the chief cause of variations in the price level, it is 
not the sole cause, and that the rate of interest both affects, 
and is affected by, the general price level. 



^y6 Credit and Currency. [§ 223 

(3) While over longer periods the money rate depends on 
the supply of capital, and while for somewhat shorter periods 
it is influenced by the level of prices, for still shorter periods it 
is affected by the temporary amount of loanable cash in the 
money market. It is this, and this only, which the ordinary 
borrower of " call money " has in mind. It is so important, 
however, that it deserves a separate treatment. 



223. The Money Market. 

The chief borrowers of money in Wall Street are those who 
want, not capital to assist them in productive enterprises, but 
funds for meeting immediate obligations or for margins in the 
speculative market. With the continual oscillations in the de- 
mand for these loanable funds, it is obvious that a comparative 
stability in the money market can be secured only by some sys- 
tem whereby the banks may expand or contract their loans at 
will without fear of depleting their reserves. To accomplish 
these results there is needed not alone a system of flexible 
note issue, but also a method of speedy replenishment of 
the reserve in the face of sudden drains. 

With reference to the elasticity of note issue, it is patent 
that if the temporarily augmented demand for funds may be 
met by notes issued on the general assets of the banks, 
rather than by the granting of bank credit in the shape of de- 
posits, 'not only will there be a slackening of the pressure 
in the money market, but the demand for cash will be met 
by notes in lieu of a drain on the specie reserve. The relative 
inelasticity of note issue in England affords a partial explana- 
tion of the wider variations of the bank rate there as com- 
pared with Germany or France (§ 215), among the other 
causes being the greater variety in character and extent of the 
demands to which England is subject as the world's money 
market. The almost complete rigidity of note issue in the 
United States explains in large part the far more violent flue- 



§ 223] Money Market. ^yj 

tuations in New York, and we have seen how in times of 
crisis the banks have been compelled to resort to the extra- 
legal method of clearing-house certificates. 

Rigidity of note issue is, however, not the sole explanation 
of the startling conditions in Wall Street. A matter of at least 
equal importance is the nature of the commercial paper, which 
retards the replenishment of the reserve. 

If a man wants to borrow money in Europe, he will sell to 
a bank his own three months' bill drawn on some private 
banker willing to extend him credit. Or if he is a merchant 
who has sold goods, he will draw on his customer, get his 
banker to indorse the bill or draft, and sell it to the bank in 
the same way. The bank which purchases or discounts this 
banker's acceptance or indorsed paper can always dispose of 
it to some one else, usually by having it re-discounted by one 
of the large central banks. In England it is the bill-brokers 
and discount companies which do the original discounting, and 
in turn secure advances from the bank of England. The result, 
however, is the same. The large banks keep most of their 
funds invested in these bills of exchange, and to a large extent 
in foreign bills. If the bills were simply ordinary merchants' 
bills, they would not serve for international purposes, the 
drawer being generally unknown beyond local circles. But 
with the acceptance of the bank, which is known everywhere, 
the bill becomes a thoroughly suitable means of investment 
and exchange. If " money tightens " in one country, the cen- 
tral banks in the other countries increase their investments in 
bills of exchange of the country where the rate goes up, and 
by purchasing this short-time paper tend to prevent the ex- 
port of specie, sending bills of exchange instead. In this way 
not only do the banks hold paper which can be almost imme- 
diately turned into cash, thus replenishing their reserves, but 
the credit of the whole community, as represented by the 
ordinary commercial bills and notes, is added to the credit of 
the bank as a means of international payments. 



^yS Credit and Currency. [§ 223 

In the United States, on the other hand, when a man bor- 
rows money from a bank, the latter keeps the note until it falls 
due. It becomes a dead or illiquid asset. There is no re- 
discounting of domestic paper, only the foreign-exchange bills 
being indorsed and resold. These long bills or *' finance 
bills," however, drawn by American bankers on their foreign 
correspondents in foreign money, are necessarily Hmited in 
amount by the extent of the bankers' credit. Since the Amer- 
ican banks can look upon their discounts of ordinary commer- 
cial paper only as illiquid assets, and cannot invest their funds 
in the bill market, as in Europe, they lend on call in the stock 
market, which thus attracts the surplus funds of the entire 
country. Moreover, since the sum invested in call loans is 
exceedingly small compared with the total amount of money 
borrowed throughout the country, it follows that a sudden 
change in the supply of loanable funds is felt far more acutely 
in this small field than would be the case if spread over the 
larger area. In Europe, if money tightens, it takes the form of 
a slight rise in the rate of discount on practically all the com- 
mercial paper of the country ; in America, if money tightens, 
the rate rises violently on call loans. As Mr. Warburg has well 
put it, the European method is like throwing a pebble into a 
pond ; our method is like casting a stone into a basin. 

The situation is further aggravated in the United States by 
two facts, — the state usury laws and the Independent Treasury 
system. Everywhere else in the world, as we know, the dis- 
count rate is raised when the reserve is threatened. The 
national banks, however, are prohibited from charging more 
than the legal rate of interest in the states in which they are 
situated. Many of our commonwealths still possess usury 
laws, and in New York the law is especially stringent (p. 409). 
Here, however, call loans are exempt, with the result of a still 
stronger influx of loanable funds into the call market rather 
than into the bill market. As most banks will charge only the 
legal rate of six per cent on time loans, and even on call loans 



§ 223] Money Market. 579 

to their regular customers, the sole method of preventing the 
outflow of gold, whenever the market rate in Europe exceeds 
six per cent, is the absurd one of an abrupt rise in the call 
rate in the open market with a resulting break in the prices of 
securities to an extent sufficient to induce Europe to buy the 
securities rather than to import gold. Thus the net result of the 
usury law is to accentuate the perturbations in the stock market. 
Finally, the operations of the Treasury are to a large ex- 
tent divorced from those of the banks. After the disappear- 
ance of the second United States Bank and the somewhat 
unsatisfactory result of using certain " pet-banks " as deposi- 
taries of the public moneys, the federal government instituted 
in 1846 the Independent Treasury system, keeping the gov- 
ernment receipts at Washington or at the nine sub-treasuries. 
Abroad, public expenditures are made as the revenues come 
in, or even in anticipation of the revenues. The government 
issues finance bills, which it discounts, placing the proceeds 
in the banks, and checking against these balances for its ex- 
penditures. In the United States the revenues are allowed to 
accumulate in the Treasury until the semi-annual payments of 
interest on the debt arrive, thus taking out of the money mar- 
ket the funds which might otherwise in the banks serve as the 
basis of large credit transactions, and then just as abruptly 
throwing the funds into the market. In the United States, 
moreover, as opposed to foreign countries which work on 
close estimates, there is often a considerable surplus of receipts 
over expenditures, which still further aggravates the situation. 
Not only has this practice helped to create a frequent strin- 
gency by locking up badly needed funds, but it has become 
customary in times of urgency to appeal to the government to 
" ease the market " by special measures of relief, putting on 
the Secretary of the Treasury a burden of a most onerous and 
responsible character, and exposing him to the oft-repeated 
but unwarranted criticism of helping only the stock gamblers 
— a criticism which completely fails to appreciate the impor- 



580 Credit and Currency. [§ 224 

tance of Wall Street as the central nerve of the country's credit 

system. 

224. Currency Reform. 

A comprehensive scheme of currency reform in the United 
States would, therefore, include at least four points : a modifi- 
cation of the Independent Treasury system, the abolition of 
the usury laws, a reform in discount methods, and greater 
flexibility in note issues. 

(i) An attempt to remedy some of the evils discussed at the 
close of the last section was made by the Aldrich law of 1907. 
Under the system which had grown up during recent years, the 
Secretary of the Treasury was in the habit of depositing in certain 
banks against government bond security the proceeds of internal 
revenues. The Aldrich law not only allows the depositary banks 
to give other security, satisfactory to the Secretary, but also 
permits the receipts from customs duties to be deposited in the 
same way, subject to an interest charge at the discretion of the 
Secretary. The Aldrich act, however, is permissive rather than 
mandatory, and under the present law the disbursements of the 
government in the sub-treasury cities must still be made through 
the sub-treasury, instead of by drafts or warrants at the deposi- 
tary banks. The authority conferred on the Secretary to in- 
crease at will the interest rates on the public deposits gives him 
in a modified form the power of protecting the country's reserves 
which is exercised by the European banks through a rise of the 
discount rate. In default of a large central bank this is perhaps 
as much as can be safely done at present. 

(2) The desirability of abolishing or modifying the usury 
law, especially in New York, scarcely needs further comment. 
It is a relic of medisevalism, and thoroughly unsuited to mod- 
ern conditions. The permission to raise, in case of need, the 
discount rate on time loans on commercial paper would deflect 
from the call market much of the surplus which is now period- 
ically poured in, only to be as suddenly removed, with the 
consequent wild fluctuations in call money. 



§ 224] Currency Reform. 581 

(3) The change in the character of commercial paper is 
more difificult to achieve, because legislation alone cannot com- 
pletely avail. Much might be accomplished, however, if the 
law were to encourage the custom by the banks of keeping 
their assets, to a certain extent at least, in easily realizable short 
paper, which might lead either to the practice of rediscounting, 
as on the European continent, or of advances to the discount 
banks, as in England. The privilege of note issue, or of ad- 
ditional note issue, might, for instance, be restricted to those 
banks which make it a practice of keeping a certain portion ot 
their deposits in such liquid assets as would be virtually equiva- 
lent to cash. In whatever way the end is attained, however, 
no complete escape from the evils in the call market is possible 
without such a modification in the character of the discounts. 
Unless this is accomplished, a system of asset banking would 
be not only illusory, but even hazardous. 

(4) The elasticity of note issue is the keystone in the arch 
of reform. Beginning with the Baltimore plan and the scheme 
of the Indianapolis Monetary Commission in 1897, the projects 
have culminated in the 1 906-1 907 reports of the New York 
Chamber of Commerce Committee on the Currency, and of 
the Currency Commission of the American Bankers' Associa- 
tion, the recommendations of the latter being, with one minor 
exception, embodied in the Fowler bill of 1907. The chief 
features in these recent schemes are as follows : 

(a) An emergency circulation is permitted. Under the 
Chamber of Commerce plan, any bank may make an ad- 
ditional issue up to 35 per cent of its capital, subject to a 
graded tax of from 2 to 6 per cent. Under the Bankers' plan, 
any bank, with a surplus fund of 20 per cent of its capital, and 
over one year in business, may issue additional notes up to 25 
per cent of its capital on paying 2^ per cent (changed in the 
Fowler bill to 3 per cent) tax, and up to 37^ per cent of its 
capital on paying 5 per cent tax. Either of these plans would 
admit of about 300 millions additional notes. 



582 Credit and Currency. [§ 224 

(J?') The principle of an asset currency is applied only in 
part to the new issues, which in order not to make too violent 
a break with existing conditions must bear some proportion to 
the bond deposits. In the Chamber of Commerce scheme 
the new issues can be made only by banks whose bond-secured 
circulation equals at least 50 per cent of their capital; in the 
Bankers' plan the new circulation itself cannot exceed 40 per 
cent of the bonds deposited. 

{c) The safety of the notes is assured by a guaranty fund, 
composed of the taxes on circulation. The Chamber of 
Commerce plan applies to this fund the existing taxes also ; 
the Bankers' plan utilizes only the emergency taxes, but 
requires an initial payment, on account, of a sum equal to 
5 per cent of the new notes. 

(^) Provision is made for the prompt redemption of the 
new issues. Under the Chamber of Commerce plan the 
government is empowered to establish redemption agencies 
at the sub-treasuries and elsewhere ; under the Bankers' plan 
the banks themselves are required to make such arrangements 
through the clearing houses for the current daily redemption 
of the notes, in cities to be designated and under regulations 
to be framed by the Comptroller of the Currency. 

((?) The limit on the retirement of existing issues is abol- 
ished, thus permitting a facility of contraction as well as of 
expansion. 

The Bankers' report recommends in addition that the same 
reserve which is now kept against deposits be kept also against 
the new notes. This is a reversion to the original legislation, 
and is in accord with the doctrine that notes and deposits are 
essentially analogous in character. 

The principles involved in these projects are to be unquali- 
fiedly commended. They seek to secure a flexibiHty of the 
currency without impairing safety and without breaking too 
abruptly with our present methods. A more ideal scheme would 
indeed be that contained in the alternative recommendation of 



224. Currency Reform — Addendum. 

The Act of May 30th, 190S, provides for an emergency cur- 
rency. Any ten national banks, each with an unimpaired cap- 
ital and a surplus of not less than twenty per cent, and with an 
aggregate capital or surplus of at least five millions, may form 
" national currency associations," not more than one of which 
may exist in any city. Any bank belonging to such an associa- 
tion, which has circulating notes outstanding of at least forty 
per cent of its capital, may issue additional notes secured by the 
deposit of either bonds or commercial paper, in trust for the 
United States. The bonds so deposited may be those of any 
state or local division which has not defaulted for ten years, and 
whose debt does not exceed ten per cent of its assessed valua- 
tion. The commercial paper deposited as security must be 
two-name paper, not exceeding four months to run. The bank 
may take out additional circulation up to ninety per cent of the 
value of the bonds and up to seventy-five per cent of the value of 
the commercial paper ; but in the last case not in excess of thirty 
per cent of its capital and surplus. All the banks belonging to 
a national currency association are jointly and severally liable 
for the redemption of this circulation, the separate liability of 
each bank being proportionate to its capital and surplus. 

When the officers of an association are satisfied with the 
security offered, they may apply for the additional notes to the 
Comptroller of the Currency, who is to have a supply of such 
notes on hand at the nearest Sub-Treasury, and who is to transmit 
the application with his recommendations to the Secretary of 
the Treasury, who in turn is finally to authorize the issue. In the 
case of security consisting of state or local bonds, however, a 
national bank may apply directly to the Comptroller, without the 

582* 



intermediary of a national currency association, and may de- 
posit the security witli the Treasurer of the United States, whose 
consent, together with that of the Secretary of the Treasury, is 
necessary. 

The total amount of emergency currency is limited to five 
hundred milhons, and in no case can any bank have outstanding 
a total note issue exceeding the amount of its capital and surplus. 
The additional circulation is taxed at the rate of five per cent for 
the first month, with an extra one per cent for each month 
until the tax reaches ten per cent, thus insuring the speedy with- 
drawal of the notes. In every case five per cent of the emer- 
gency circulation is to be kept on deposit in the Treasury of 
the United States in addition to the redemption fund in the 
ordinary circulation. The notes are to be distributed as far as 
possible in accordance with relative banking capital, with a cer- 
tain discretion in the hands of the Secretary. That is, the 
Secretary shall not approve applications from associations in 
any state in excess of that state's proportion as measured by 
banking capital, but in case applications from associations in 
any state shall not equal the amounts which they might 
legally issue, the Secretary may assign the amount not applied 
for to any association in the same section of the country. All 
national banks are hereafter to pay at least one per cent interest 
on deposits of public moneys. The act is to remain in force six 
years, and provision is made for a National Monetary Commission. 

The new law with its cumbrous machinery is plainly a make- 
shift and in no sense a solution of the difficulties in the currency 
situation. 



583^ 



§ 225] Credit and Crises. 583 

the Chamber of Commerce for a central bank. That, however, 
seems to be beyond the pale of practical politics. It may be 
queried, however, whether it is not possible at all events to 
substitute some association of the larger banks, to which alone 
should be intrusted the privilege of note issue, and through 
which, in consultation with the government, some more unified 
policy of protecting the gold reserve might be evolved. That 
some such scheme of further centralization is desirable and 
ultimately inevitable will scarcely be questioned. In default 
of such a project, however, the grafting of an asset currency 
upon the present bond-secured circulation merits cordial 
approval, although great care must be observed to make the 
tax sufficiently high to prevent the emergency circulation from 
being kept out permanently, and thus resulting in inflation 
rather than elasticity. Here, as in all similar domains, the 
advantages accruing to the banks must be made subservient to 
the interests of the community as a whole : self-interest must 
be subordinated to the common interest. 

225. Credit and Crises. 

Crises are sometimes classified as financial and commercial 
or industrial crises. In point of fact, since the bank is the 
nerve centre of modern business, all crises are financial crises. 
What is meant by the alleged distinction is that in some cases 
attention is directed to the immediate occasion of the crisis in 
the shape of bad banking or bad currency or stock-exchange 
speculation, while in other cases regard is paid to the under- 
lying cause in the general conditions of business. 

Crises are essentially modern phenomena. They are a 
product of the new system of business enterprise, built up on 
capital and credit. Sporadic instances are found in earlier 
centuries, but it is only since the domination of the factory 
system that crises have become a regular occurrence. During 
the nineteenth century a certain rough periodicity may be ob- 
served in the world crises transmitted from country to country. 



584 Credit and Currency. [§ 225 

The important ones were those of 1825, 1836-1839, 1847, 1857, 
1873, 1884, 1890, 1893, 1900, and 1907. 

The surface facts of the phenomenon are famiUar. There is 
a rhythmic movement in all modern business. At a certain 
period " times are good," prices rise, all manner of new enter- 
prises are launched, bank facilities are extended, and prosperity 
is found on every side. Then in the height of this period of 
exaltation, something happens to disturb confidence. A chance 
occurrence, a mere rumor, may sufifice. Some bank or financial 
institution considers its credit too heavily engaged or suspects 
that the collateral deposited with it for loans is inadequate. 
Just at the flood of the tide, when new demands are constantly 
being made, it finds itself unable or unwilling to respond. Its 
refusal intensifies the feeling of insecurity, and with the inability 
of some important concern to meet its obligations a failure 
occurs. At once every other institution takes in sail, and en- 
deavors to realize on its collateral ; that is, creditors demand 
payment and debtors, in their frantic effort to pay, sacrifice 
securities, often in vain. Prices fall with a thud, failure suc- 
ceeds failure, and the panic is complete, carrying in its wake 
loss and suffering to every part of the economic community. 
Then follows a period of more or less long continued depres- 
sion, low prices ^nd " hard times " with chronic unemploy- 
ment and low wages, until gradually the wave of prosperity 
again sets in, and the process repeats itself. 

According to the point of view from which the subject is 
approached, the explanation usually given is that of overpro- 
duction or underconsumption. The theory of overproduction 
states, not that there is a general glut of commodities — 
for that would imply that there can be too much wealth, 
which is absurd — but that there are more goods than can 
be sold at a profitable price. Whether this overproduction 
starts with particular commodities and becomes relative over- 
production or extends to all commodities and becomes general 
overproduction is immaterial. The remedy for crises then 



§ 2 25] Credit and Crises. 585 

would be to produce less, either of certain things or of all 
things. On the other hand, the theory of underconsumption 
emphasizes the inability of the consumer to pay enough to 
keep the industries going. Were the consumer to save less and 
to spend more, crises might be averted. 

The true explanation of crises is somewhat different. The 
whole problem is one of capitalization. All investment values 
are, as we know (§ 1 1 7), the result of the capitahzation of esti- 
, mated earnings. The factory system is one of iiiass production 
for the anticipated market, not of production to order for a 
given market. Even if it be said that modern steel mills only 
fill definite orders, it is none the less true that immense plants 
are constantly being erected in the expectation that orders will be 
received in the future. A period of good times may be initiated 
by large orders for some particular business, — due, for instance, 
to a new navy programme, to internal improvements, to a war 
or to any other large demand. Prices rise in that business, pro- 
duction increases, the movement spreads to other Hues, and the 
new enterprises are financed by loans from the banks or by the 
sale of securities on a capitalization proportionate to the antici- 
pated earnings. The psychological character of these credit 
transactions is such, as we have seen, that the capitalization will 
inevitably be put too high. The hoped-for earnings do not 
come in an amount sufficient to justify the investment. It 
becomes necessary to reduce the capitalization to its true 
market value on the basis of actual earnings. This process of 
readjustment of overcapitalized values necessarily involves loss ; 
but readjustment there must be. If the realization of its neces- 
sity is sudden, we have a crisis or panic ; if it can be brought 
about gradually, we have a process of liquidation. In any event 
there follows a period of depression, which must continue until 
the readjustment of capitalization to actual earning capacity has 
become complete. 

Crises therefore are not necessarily a result of increased tech- 
nical production. The important point is not production, but 



586 Credit and Currency. [§ 225 

capitalization. The crisis of 1837 was due to the overcapi- 
tahzation of land values ; the liquidation of 1903 to the over- 
capitalization of trust values. In neither case was there any 
increased production. Overproduction may indeed accompany 
overcapitalization, but the emphasis is to be put on the discrep- 
ancy between the investment and the returns. In this sense 
all crises and depressions are credit phenomena. 

Inasmuch as modern business enterprise is based on credit, 
it is obvious that even an ideal banking and currency system, 
cannot in itself avert crises. It may mitigate the evils by pro- 
viding great elasticity and preventing the shock of a sudden 
panic ; but the ultimate readjustment must come. More, how- 
ever, is to be hoped for from the newer tendencies in the organi- 
zation of economic life. With the growth of the business unit 
and the integration of modern industry it is possible to dis- 
cern the beginnings of a more equable and better regulated 
method of enterprise and capital investment. With every decade 
panics are visibly becoming less severe. Like some of the other 
economic evils of the nineteenth century discussed in the pre- 
vious book, financial crises seeem to be peculiar to the infancy 
of the factory system. Here, as elsewhere, the task of the future 
consists in retaining the advantages of a healthy competition 
while doing away with its abuses. Rhythmic oscillations in 
prosperity and adversity will no doubt continue to occur in busi- 
ness life as elsewhere. But with a better grasp of the principles 
of credit, with an increasing responsibility of promoters to in- 
vestors, with a more stable demand on the part of the wage- 
earning consumers, and above all with the more efficient 
regulation of production through the newer forms of business 
enterprise we may reasonably look forward to a fairly successful 
adjustment of capitalization to real earning capacity and to a 
more complete adaptation of the present to the future. When 
this stage is reached, credit will be shorn of its lurking dangers 
and will stand forth in its true light as an unmixed benefit to 
solid economic progress. 



CHAPTER XXXII. 
INTERNATIONAL TRADE. 

226. References. 

J. E. Cairnes, Prmciples {1874), part 3 ; C. F. Bastable, Theory of In- 
ternational Trade (4th ed., 1903) ; G. Clare, The A B C of the Foreign 
Exchaijges (1893); ^- ^- Margraff, International Exchange, a Practical 
Work on the Foreign Banking Department (1903); Clive Day, A His- 
tory of Commerce (1907); G. J. Goschen, Theory of the Foreign Ex- 
chatiges (7th ed., 1866) ; F. Y. Edgevvorth, Theory of International Valties 
(Econ. Jour., IV, 1S93) > F. Walker, Increasing and Diminishing Costs in 
International Trade (Yale Rev., XII, 1904) ; R. Giffen, The Use of Export 
and Import Statistics, in his Inquiries (1904), ch. ix ; T. Bacon, Ameri- 
can International Indebtedness (Yale Rev., IX, 1900); H. Fawcett, Free 
Trade and Protection (3d. ed 1879) > ^- W. Taussig, Tariff History of the 
United States (1892); E. Stanwond, American Tariff Controversies in the 
Nineteenth Century (2 vols., 1903) ; W. J. Ashley, Tariff Problem (2d ed., 
1904) ; L. Porritt, Sixty Years of Protection in Canada (1908). 

227. Basis of International Trade. 

It was long supposed that the principles of international 
trade differed from those of internal commerce, in that the 
former was subject to the law of comparative cost and de- 
pendent on the existence of non-competing industrial groups. 
We now know that the law of comparative costs or of recipro- 
cal demand is the explanation of all exchange (§ 95), and 
that non-competing industrial groups are found in internal in- 
dustry as well (§ 178). Trade takes place between nations 
as between individuals, because of relative, not of absolute, 
advantages. One country A may produce a certain class of 
commodities more cheaply than B and nevertheless find it 
profitable to import them, because A can produce other com- 
modities still more cheaply than B. It will be advantageous 
for A to export the second class of commodities and to receive 

587 



588 



International Trade. [§ 227 



pay for them by importing the first. The entire body of eco- 
nomic doctrine elaborated by Ricardo, Mill and Cairnes, tend- 
ing to show that international trade rests on the equation of 
reciprocal demand and comparative cost, has no distinctive 
application to international exchange and therefore calls for 
no special discussion here. 

In only one respect, albeit a most important one, does ex- 
change between nations differ from that between individuals. 
In both cases indeed a surplus enjoyment is sought. The 
individual endeavors to obtain this in the form of money, 
because the more money he has the richer he is. The nation, 
however, cannot follow this course. The mere accumulation of 
money is bootless. A nation can do only one of three things 
with its funds, (i) The money may be hoarded. In mod- 
ern times, however, this is not done, because public credit is a 
cheap substitute for government hoards ; and because after a 
relatively insignificant point has been reached, a reserve of 
coin, whether for currency or for banking purposes, becomes 
unnecessary or even wasteful, (2) The money may be spent 
at once. If expended abroad, the purchases must come in as 
imports ; if spent at home, it diverts to profitable home con- 
sumption what would otherwise have been available for export. 
In the one case imports are increased, in the other exports 
are lessened. (3) The money may enter general circulation. 
The necessary result of this is to raise the level of domestic 
prices, to check exports and to augment imports, until the 
money flows out again and the international level of prices is 
restored. 

It is for this reason that imports must in the long run pay for 
exports, and vice versa. This does not mean that at any given 
time imports and exports must be equal. The state of recip- 
rocal liabilities between one country and the outside world 
may be such as to lead to a permanent excess of either exports 
or imports. It might be supposed that an excess of imports 
would represent profits on the transaction. One nation A may 
sell its goods abroad at an advantage, and may elect to bring 



§ 22 7] Basis. 589 

in its gains in the shape of additional goods, which would then 
constitute a surplus of imports. Ordinarily, however, the other 
nation B will do the same, so that on the second transaction 
there will be a surplus of exports from A to B. Assuming the 
gains to be equal, these will balance each other. Thus, while 
both parties secure a surplus of satisfaction, there will be no 
excess of exports or imports. 

On the other hand, it must be remembered that goods are ex- 
changed not only for goods, but for services. If a country per- 
forms valuable services for others, they must be remunerated, 
and the payment will ultimately assume the form of extra im- 
ports. England, for example, at the present time does at least 
three things for the rest of the world. ( i ) The British merchant 
marine is so immense that a large amount of trade between 
other countries is carried on in British bottoms. The freights 
paid by foreigners go to swell British imports. (2) The British 
system of marine insurance is so much more admirably organ- 
ized than that of other countries, that a great part of the ships 
and cargoes of other countries are insured by British firms. 
The profits of this business also increase the volume of im- 
ports. (3) International debts, as we shall see in § 228, are 
liquidated largely by the purchase of bills of exchange on 
London. The commissions to the London bankers again 
reach England in the form of imports. Freights, insurance 
profits, and commissions together amount to a few hundred 
millions of dollars a year. Finally, it must not be forgotten 
that in modern times international transactions take place in 
securities as well as commodities. If a nation has invested 
heavily in foreign bonds, government or industrial, the interest 
on the invested capital will accrue in the shape of imports. 
Another portion of the vast surplus of British imports is 
ascribable to this fact. 

The so-called favorable balance of trade is for several reasons 
a delusion. It is difficult to state with accuracy the exact rela- 
tion between exports and imports : for (a) where there is a 
long frontier or seacoast, it is wellnigh impossible to include 



59' 



International Trade. 



[§ 227 



everything ; (3) even where everything is included, there is no 
assurance against fraud or undervaluation ; and (^) there is 
no uniformity as to whether values should be calculated at the 
place of export or of import, that is, whether cost of transpor- 
tation should be included. The statistics themselves are there- 
fore of dubious value. Even if the balance could be accurately 
ascertained, however, it would not tell us anything of impor- 
tance. Some prosperous countries, like England, Germany 
and France, habitually import far more than they export ; 
some poor countries, like Peru, Siam and San Domingo, 
habitually export more than they import. The following table 
will show the relation of exports to imports in the principal 
countries of the world : 



THE RELATION OF EXPORTS TO IMPORTS IN 
THE PRINCIPAL COUNTRIES. 





Year. 


Imports. 


Exports. 


Excess of Ex- 
ports (+) or 
Imports ( — ). 


United Kingdom 

Germany 

France 

Netherlands . . . 

Belgium 

Italy 

Switzerland . . . 

Japan 

United States . . 

Russia ; 

British India . . . 
Brazil 

Egypt 

Roumania .... 

Siam 

Haiti 


1903 
1903 
1903 
1903 

1903 
1903 
1903 
1903 
1904 
1902 
1902-3 
1903 
1903 
1903 
1902 
1901 


Dollars. 

2,640,564,000 

1,428,640,000 

926,632,000 

912,376,000 

512,679,000 

359.358,000 

230,860,000 

157.935,000 

991,087,000 

308,563,000 

278,054,000 

120,747,000 

82,811,000 

52,095,000 

15,782,000 

5,500,000 


Dollars. 

1,415,179,000 

1,193,483,000 

820,685,000 

781,750,000 

407,295,000 

292,867,000 

171,485,000 

142,411,000 

1,460,827,271 

443,016,000 

409,535,000 

180,219,000 

96,584,000 

68,637,000 

21,103,000 

12,760,000 


Dollars. 

—1,225,385,000 

-235,157,000 

— 105,447,000 

—130,626,000 

—105,384,000 

—66,491,000 

-59,375.000 

—15.579,000 

+469,7.77900 

+ 134,503,000 

+ 131,481,000 

+ 59,472,000 

+ 13,733,000 

+16,542,000 

+5,321,000 

+7,260,000 



The table on the following page and the chart opposite will 
show the conditions in the United States for the past few 
decades : 



Q 

LU 

H- 

ce 
O 

Q 

<t 
Q 

UJ 

1- 

oc 
o 

a. 

X 

LU 

LU 
C/5 

Q 

■< 
X 

o 

DC 

UJ 


































































80-,M)6l 
iO-«06I 
90-S061 
S0-K)6l 
W-806t 
80-«)eT 
50-T06T 
10-0061 
00-6681 
66-8681 
86-i68l 
,16-9681 
96-S68I 
56-^681 
f-6-8681 
86-5681 
56-1681 
16-0681 
06-6881 
68-8881 
88-i88i: 
i8-«88: 
98-S881 
S8-t88t 
W-«88[ 
88-5881 
58-1881 
18-0881 
08-62,81 
6i-8i8I 
8i-i28l 

9i-Si8X 

Si-flSl 

8i-5i8I 

si-xi8i: 

Ii-02.81 
0i-698X 


/ 




















,. 


-■ 


-•■ 


'' 








































•V 


V. 
















"-• 


•-. 


^_ 


















































^ 


^ 
















^ 


















































^ 


\ 
















*» 


^^ 
















































\ 
















1 


















































\ 


























































y 


/ 






















\ 


^ 






































S 


s 




































































">» 


"^ 


»s, 


















■^«. 


,^ 












































/ 






















\ 


l^ 










































"^ 


■^ 


^ 


■>> 












, 


-' 




















































s 


s 






/ 
1 




























































N 


s 
































































/ 




\ 


^s 


























































^ 


r" 


'*• 


■* 




























^ 1 




















^ 


y 


\ 


\ 




















































s 


N 




























































\ 
































































\ 


•N| 


























































■\ 






















































y 
























































V 
























































/ 




" 




























































1 




• 
' 


' 
























































k- 


/ 


























































s 


>i 


























































^ 


^ 


^ 


^ 


■\ 
























































\ 








i 


1/ 
























































^ 


'S 


s 




"■^ 


*- 


^ 
























































^ 


L 








r. 
1 






















































\ 


N 
































































\ 




« 




























































































































A 






























































/ 


K 


V 




























































» 




\ 


\ 


























































^ 


^> 


^ 




1 
































































\ 






8 < c 

8 -J ' 

S o 

r-T Q 


liiiiliiliiilii§^ 



Exports and Imports. 



59 



EXPORTS AND IMPORTS OF MERCHANDISE, 
UNITED STATES. 



Years ending 
June 30. 



1872 

1873 
1874 
1875 
1S76 
1877 
1878 
1879 

iSSo 
1881 
1882 
1S83 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
1891 
1892 

1S93 
1S94 

1895 
1896 
1S97 
1S98 
1899 
1900 
1 901 
1902 

1903 
1904 
1905 
1906 
1907 
1908 



Total Exports. 



M44. 1 77,586 
522,479,922 
586,283,040 
513,442,711 
540,384,671 
602,475,220 
694,865,766 
710,439,441 
835,638,658 
902,377,346 
750,542,257 
823,839,402 
740,513,609 
742,189,755 
879.524,830 
716,183,211 

695,954,507 

742,401,375 

857,828,684 

884,480,810 

1,030,278,148 

847,665,194 

892,140,572 

807,538,165 

882,606,938 

1,050,993,556 

1,231,482,330 

1,227,023,302 

1,394.483,082 

1,487,755,557 

1,381,719,407 

1,420,141,679 

1,460,868,185 

1,518,561,666 

1, 743.864,500 

1,880,851,078 

1,860,773,346 



Imports. 



$626,595,077 
642,136,210 
567,406,342 

533,005,436 
460,741,190 

451,323,136 
437,051,532 
445-777,775 
667,954,746 
642,664,628 
724,639,574 
723,180,914 
667,697,693 

577,527,329 
635-436,136 
692,319,768 

723,957,114 
745,131,652 
789,310,409 
844,916,196 
827,402,462 
866,400,922 
654,994,622 

731,969,965 

779,724,674 

764,730,412 

616,049,654 

697,148,489 

849,941,184 

822,6/3,016 

903,320,948 

1,025,719,257 

991,090,978 

1,117,513,071 

1,226,562,446 

1,434.421,425 

1, 194. 31', '92 



Excess of Ex- 
ports over 
Imports. 



$18,876,698 



79,643 
I5I-I52 
257,814 
264,661, 
167,683 
259,712, 

25,902 
100,658 

72,81 5; 
164,662, 
244,c88 

23.863 



,481 
,084 

i234 
666 
912 
718 
683 
488 
916 
426 
,694 
443 



68,518, 

39,564. 
202,875, 



275 
614 
686 



237,145: 

75.568, 
102,882, 
286,263, 

615.432: 
529,874 

544,541: 
665,082, 
478,398, 
394.422 

469,777. 
401,048, 

517,302. 
446,429 
666,431, 



.950 
,200 
,264 
,144 
,676 
,813 
,898 
,541 
413 
.442 
,267 

595 
054 
.653 
•554 



Excess of 

Imports over 

Exports. 



$182,417,491 
119,656,288 

19,562,725 



28,002,607 
2,730,277 



18,735,728 



592 



International Trade. 



[§ 227 



Finally, the following table will show the proportion of 
United States exports and imports to and from the various 
parts of the world : 

PERCENTAGE OF IMPORTS AND EXPORTS FROM 
AND TO GRAND DIVISIONS.i 





Year ending June 30. 


1894. 


1897. 


1900. 


1904. 


1907. 


Europe : 

Imports 

Exports 

North America: 

Imports 

Exports 

South America : 

Imports 

Exports 

Asia : 

Imports. .. .0 . . 

Exports 

Oceania : 

Imports 

Exports 

Africa: 

Imports 

Exports 


45-05 
7S.56 

25.49 
13.42 

1529 
lO.fO 

2-34 

3.28 
1-34 

•53 

•55 


56.26 
77-39 

13-85 
11.89 

14.04 
3.21 

II. 41 
3-74 

3-19 
2.16 

1-25 
1.61 


51.84 
74.60 

15-30 
13-45 

11.02 
2.79 

16.45 
466 

4.07 
3-II 

1.32 
1-39 


50-32 
72.42 

20.06 
16.08 

12.14 
3-47 

14.48 
4.12 

205 
2.25 

-95 
1.66 


52.40 
69.03 

18.37 
18.60 

11.17 

4-37 

14.81 
4-93 

2.08 
2.19 

1-47 
.88 



An excess of imports may represent the incurring of liabili- 
ties to other countries which must be met hereafter, or it may, 
on the contrary, represent a liquidation of past or present in- 
debtedness by other countries. In the same way an excess of 
exports may mean that one country is making others its debt- 
ors or, on the contrary, it may be a measure of the amount of 
tribute which that country is paying to others for past or pres- 
ent favors in the shape of capital invested or services rendered. 
In itself the so-called balance of trade is irrelevant. 

1 Report on the Fo7-eign Commerce ami Navigation of the U.S., 1904, 
Vol. II, p. 1030, continued in the Statistical Abstract. 



§ 228] Rate of Exchange. 5^3 

The error consists in confounding a surplus of exports over 
imports with a surplus of production over consumption. A 
nation, like an individual, ought indeed to produce more than 
it consumes, in the sense that the surplus product or surplus 
energy can be converted into durable capital and thus contin- 
ually augment the command of man over nature. But the 
surplus of production over consumption is a very different 
thing from a surplus of exports over imports. 

228. Rate of International Exchange. 

International like domestic transactions are settled in terms 
of money : the machinery for effecting payments differs in 
magnitude, not in principle. A merchant A in France, let us 
say, has imported coffee from M in Brazil, while B in France 
has exported the same value of silks to N in Brazil. Instead 
of A sending money to M, and N sending it back to B, it is 
far simpler for A and B to settle with each other in Paris, and 
M and N in Rio de Janeiro. B accordingly writes an order, 
known as a bill of exchange, to N directing him to pay M, or, 
in technical language, B draws on N ; A buys this bill from B 
.and remits (z. e, sends) it to M, who presents it to N and gets 
it cashed. Thus no money is exported and only one bill is 
drawn. Inasmuch as it is not always easy for the M's and N's 
to find each other in Rio de Janeiro, and the A's and B's in 
Paris, the business of issuing and purchasing such bills has 
become the function of the banker and the bill broker. More- 
over, since these bills can be transferred by indorsement, they 
are available for payment not only between France and Brazil, 
but between any other countries that have dealings with either 
one. This explains the so-called " three-cornered " ex- 
change, where country A imports from B and pays by drafts 
on C which has imported from A. Finally, since it is necessary 
to make out only one transferable order, bills are generally 
drawn on that country which possesses the larger financial 
centre. In fact, the great mass of bills especially in the case 
of exchanges between less important countri-es, are to-day drawn 

38 



^g4 International Trade. [§ 228 

on London in pounds sterling. This is due chiefly to the im- 
mense volume of British trade, to the stability of the British 
currency, and to the fact that the seller of a bill on London 
can almost invariably count upon finding a buyer on advanta- 
geous terms. 

Where the reciprocal liabilities of two countries are precisely 
equal, that is, where the payments to be made exactly balance 
each other, exchange is said to be at par. This means that the 
amount of bullion paid for a bill in one country is the exact 
equivalent of the value of the bullion received in the other coun- 
try. The fine gold in a pound sterling, for instance, is equal to 
the fine gold in ^4.86f ; hence the par of exchange between 
England and the United States is ^4.86f. It is obvious that 
deviations from the par are due to changes in the condition of 
reciprocal liabilities, which, owing to the continual oscilla- 
tions of the market, are never for any length of time precisely 
equal. On some days or seasons there will be a balance in 
one direction and the demand from would-be purchasers of 
bills exceeds the supply. At other times the supply of bills 
offered for sale will exceed the demand. According to these 
fluctuations bills become dear or cheap, and exchange will 
be above or below par. The meaning of the phrase " a rise 
or fall in the rate of exchange" depends on whether, in quot- 
ing the par, the base line is the domestic or the foreign unit. 
Thus in London the par of exchange with some countries 
is quoted in pence ; with others in the currency of those 
countries, like francs or marks. In the United States the 
par is generally quoted in dollars, so that when exchange is 
said to rise it means that purchasers of bills must pay more 
dollars because there is a greater demand for remittances to 
settle obligations abroad. The hmits within which the rate of 
exchange can deviate in either direction from par are called the 
" gold points," that is, the points beyond which it becomes profit- 
able to export or to import gold in settlement of the balance. 
It is only in exceptional instances, as in the case of a very 
stringent money market when dealers are ready to sell bills at a 



§ 228] Rate of Exchange. 595 

sacrifice or when there is a short-lived difficulty in a gold-pro- 
ducing country converting its bullion into coin, that it is pos- 
sible for exchange to fall below the specie point, or to rise 
above it. 

When the exchanges are not calculated on a gold basis, the 
deviations are such that we cannot properly speak of a par at 
all. If a gold standard country trades with a silver standard 
country, the par itself fluctuates with the daily change in the 
gold price of silver. The same is true of a depreciated paper 
currency, where a new limit to the rise in the price of bills is 
fixed by the premium on gold. 

In the United States, foreign bills are known as documentary 
and finance bills. Documentary bills are those drawn against 
the export of commodities, payable at sight or on the expira- 
tion of three, ten, thirty, sixty or ninety days. They have 
attached to them as security the bill of lading, insurance cer- 
tificates, shippers' invoices, and occasionally other documents 
Hke consular certificates, certificates of origin or government 
inspection certificates. Finance bills are those drawn by 
American bankers on their European correspondents. They 
are often covered by collateral security in the shape of stocks 
or bonds listed on the New York stock exchange. The ordi- 
nary causes of an over-supply of " foreign bills " are : (i ) large 
exports of cotton, wheat and corn, especially from August to 
November of each year; (2) heavy purchases of American 
securities by European houses ; (3) high interest rates in New 
York. In the latter case American bankers find it profitable to 
issue sixty or ninety day bills on London and " sell sterling," 
loaning the proceeds on Wall Street. If the interest rate in 
New York is six per cent and the discount rate in London 
three per cent, there will be a profit over and above the com- 
missions of the drawees and the British stamp taxes. In order 
to eliminate the risk of having to pay a higher price for the 
sterling draft required when the loan matures, they buy at 
once a foreign exchange " future " or demand draft for future 
delivery. These foreign exchange " futures " perform the 



596 



International Trade, [§ 228 



same function as the wheat and cotton futures described in 

§155. 

Since the rate of exchange depends on reciprocal habilities, 
anything that affects temporary indebtedness causes the rate to 
fluctuate. If we were to strike a balance sheet in the foreign 
trade of any country, we should have to put on the credit side 
not only the exports of commodities, but such items as freights, 
commissions, brokerages, the excess of insurance premiums over 
payments, loans from a foreign country, interest on loans to a 
foreign country, profits on capital invested abroad, the amount 
drawn on letters of credit belonging to travellers from abroad, 
the sums brought in by immigrants, sales of securities, and the 
gains made on arbitrage operations. All these items act on 
the rate of exchange precisely as do exports ; that is, they tend 
to diminish the demand for bills or to reduce the rate of 
exchange, and they require additional imports to restore the 
equilibrium. So on the debit side we must put not only the 
imports, but the purchases of securities, the loans to a foreign 
country, the interest on loans from abroad, letters of credit 
issued to travellers going abroad and the like. These tend to 
increase the demand for bills and to raise the rate. 

Gold will therefore be exported or imported only when it 
is necessary to restore the equation of international indebted- 
ness. This equation or equilibrium, however, as has just been 
explained, is not between exports and imports but between 
credits and liabilities. The equilibrium is attained when the 
credits balance the liabilities, and may be perfectly compatible 
with an excess of either imports or exports. Unless there are 
special causes arising out of some defects in the currency sys- 
tem itself, as, for instance, during the period of the silver agi- 
tation in the United States, especially from 1894 to 1896, 
gold will be exported when the liabihties for a time exceed 
the credits, but not necessarily when the imports exceed the 
exports. The permanent international distribution of the 
precious metals is therefore dependent on the conditions of 
international trade Jh the broadest sense. Thus we reach 



§ 229] Growth of Free Trade. 597 

from another point of view the conclusion reached above 
(§ 196), that no country on a sound currency basis can per- 
manently have more or less money than it needs. 



229. Growth of Free Trade. 

By free trade is meant nowadays the freedom of interna- 
tional trade from interference by government restriction or 
prohibition. Originally, however, the demand for freedom of 
trade applied as well to internal commerce. In classic Rome 
the portoria comprised all classes of taxes on transportation. 
In mediaeval Europe town was shut off against town and 
province against province by burdensome tolls and interdic- 
tions, and at every point on the land and water highways large 
sums were exacted, just as strangers who to-day traverse the 
region of some mid-African potentate are required to pay 
exorbitant passage fees. The origin of interference with trade 
is thus to be sought in the double reason, — the primeval 
assumption, of which there are still so many survivals, that 
strangers are synonymous with enemies, and the opportunity 
of securing a simple and abundant revenue. With the grow- 
ing recognition of the mutual advantages of an unimpeded 
trafific, and with the discovery of other equally good sources 
of income, these relics of a more primitive economic life 
gradually disappeared. In the United States the results of the 
commercial jealousy among the states that had just won their 
independence were so disastrous that the new constitution of 
1789 made it impossible for any commonwealth to interfere 
with interstate commerce. Freedom of internal trade is now 
assured in the whole civihzed world, subject only to necessary 
police regulations. 

Even in the sense of international commerce, however, free 
trade signifies at present something quite different from what 
it denoted in former centuries. In the middle ages the liberty 
of exporting commodities was often restricted to especially se- 
lected individuals or companies or limited to certain localities, 



598 



International Trade. [§ 229 



as in the case of the Staple ^ towns in England and her conti- 
nental possessions. The cry for free trade which arose in 
seventeenth-century England involved the demand for free- 
dom of export in the sense of freedom from monopolist com- 
panies or favored towns (§ 50). It was advanced by the very 
individuals who were clamoring for protection through high 
duties on imports. Free trade in the modern sense of free 
imports was a later conception. 

The mediaeval impediments to international trade apart from' 
those just mentioned consisted of taxes and prohibitions. In 
the opening centuries of the middle ages they were appHed 
primarily to exports, and even after " free trade " in the earlier 
sense had been attained the customs ^ duties of the European 
countries still consisted to a large extent of taxes on exports. 
It was free trade because the duties applied to all individuals 
alike, and because the goods might be shipped anywhere after 
payment of the tax. A pronounced increase of import duties, 
however, was effected by the rise of the Mercantile system in 
the seventeenth century. With the awakening of the national 
spirit and the desire to foster domestic industry, restrictions 
were imposed on the importation of any foreign commodities 
that might interfere with home production. The system of 
protection was not new, but it was now applied on a national 

1 The word staple is derived from the German stapeln, " to heap up," 
and was applied to certain commodities which were stored in large quan- 
tities in the Steel-yard (i.e. the Staple yard, " Stapelhof ") which the 
Hansa towns maintained in London. The list of staple articles which at 
first comprised chiefly wool, woolfells, tin, and leather, was gradually 
increased until the number of staple articles at present is considerable. 

2 The term "customs tariff " has a bizarre origin. The English kings 
were forced to rely far their revenue, apart from the crown lands, to a 
very large extent on the export and import duties. These became the 
customary revenue, until finally Parliament granted various rates known 
as the Great Customs and the Little Customs. The second part of the 
modern term was formerly said to be derived from the town of Tarifa 
on the Mediterranean near the Straits of Gibraltar, where the Barbary 
pirates held the straits and exacted a graduated scale of passage money 
from all vessels. More recent etymologists, however, now trace it to the 
Arabic " ta'rif," or inventory. 



§ 229] Growth of Free Trade. ^^c^ 

scale. In those countries which possessed colonies, like Por- 
tugal, Spain, the Low Countries, France and England, it be- 
came known as the Colonial system, and only later acquired 
the name of the Protective or Mercantile system. It consisted 
of several or of all of the following factors : 

(i) Bounties on the raising or export of raw materials in 
the colonies ; (2) limitation to the mother countries of the 
export of certain enumerated commodities from the colonies ; 
(3) prohibition of colonial production of manufactured arti- 
cles ; (4) high protective or even prohibitory duties on im- 
ports of manufactures from abroad; (5) restriction of the 
carrying trade between the colonies and the mother country 
to vessels of the latter. In the case of food the policy of 
agricultural protection fluctuated between bounties on exports 
and high duties on imports. 

It was in England that the system was carried to an extreme, 
and it was there that the reaction first came. During the period 
of the industrial revolution, which, as we know, began in Eng- 
land several decades earlier than elsewhere, Great Britain pur- 
sued a policy of the most rigorous industrial protection. Not 
only were many of the import duties quite prohibitory, but the 
export of machinery or even of the plans of machinery was 
absolutely forbidden. Compared with the British tariffs of the 
end of the eighteenth and the beginning of the nineteenth cen- 
tury, even the most complex of modern tariffs is simplicity itself. 
When Great Britain had finally attained a virtual monopoly of 
the chief industries and had established her supremacy on the 
ocean, she naturally found it to her interest to let down the bars. 
Not fearing foreign competition any longer at home, her great 
need was to secure an outlet for her surplus products. More- 
over, the transition from the agricultural economy to the factory 
system had converted her from an exporter to an importer of 
food. The industrial interests experienced no serious oppo- 
sition to the policy of relaxing the barrier of import duties on 
manufactures. But when they sought to secure cheaper mate- 
rials and food by abolishing the agricultural duties, they met 



6oo International Trade. [§ 229 

with a stout resistance from the landed interests. The victory 
of the Anti-Corn-Law-League in the forties was the final tri- 
umph of the industrial over the agricultural interests. Free 
trade was now an accomplished fact. 

For a short time the free trade movement made some head- 
way in other European countries, although in several it was 
subordinate to the wider scheme of removing the remnants of 
mediaeval shackles on internal trade and industry in general. 
With the revival of the national sentiment, however, first in 
Germany and Italy and then elsewhere, the last quarter of 
the nineteenth century witnessed not only a return to, but an 
intensification of, protection. Finally, as the younger indus- 
trial nations are attaining their maturity. Great Britain is com- 
mencing to lose her proud position of complete industrial 
domination, and we accordingly find since the beginning of 
the twentieth century in the classic home of free trade itself a 
sharply defined movement for a return to protection. 

In the United States the system of protection on a national 
scale began with the threatened dangers to the industries that 
had been called into existence by the war of 18 12. From that 
day to this, the protective policy has been followed, interrupted 
only for the few decades during which the non- industrial South 
was in the political saddle. With the downfall of slavery there 
began an era of far more stringent protection which has con- 
tinued with slight oscillations to the present. 

The chief dates in the tariff history of the United States are 
as follows : 1789, first tariff with a few small protective duties, 
and a general level of five per cent on the non-protected com- 
modities ; 1816, first general protective tariff, with rates of 
thirty per cent and over on certain textiles; 1824, moderate 
increases; 1828, the "Tariff of Abominations," with higher 
rates and duties on raw materials; 1833-1841, the Com- 
promise Tariff, with gradual reductions; 1842, slight changes, 
but a comparatively low level; 1846, the Free Trade Tariff, 
with ad valorem revenue duties; 1857, a still lower revenue 
tariff; 1861, 1862 and 1864, War Tariffs, with incidental pro- 



§ 230] Argument for Protection. 601 

tection ; 187 1, ten per cent reduction; 1875, restoration to 
the old level; 1883, slight changes; 1890, McKinley Tariff, 
with higher rates; 1894, Wilson Tariff, with reduced rates; 
1897, Dingley Tariff, with higher rates; tariff of 1909, now in 
force, with slight reductions. 

Free trade, therefore, as a world policy is far from being 
assured. In fact the tendency of recent years is away from 
the more liberal movement. It is accordingly necessary to 
consider the arguments somewhat more closely. 

230. The Argument for Protection. 

The reasons that have been usually advanced in favor of 
protection may be reduced to five heads. 

(i) The "balance of trade" argument claims that it is 
necessary to restrict imports in order to secure a surplus of 
exports and thus to increase the wealth of the country by aug- 
menting the stock of the precious metals brought in through 
this favorable balance of trade. The fallacy of this old 
Mercantilist contention is obvious, (a) In the first place, 
exports, as we have seen, must in the long run pay for im- 
ports, and it is impossible to increase the surplus of exports 
simply by diminishing imports. (^) Secondly, coin is not 
imported when exports exceed imports, but when credits 
exceed liabilities, (r) Thirdly, wealth does not consist of 
money, but of money's worth, and after a certain point has 
been reached the importation of coin defeats its own object. 
So defective indeed is this argument that it is no longer 
advanced by serious students. 

(2) The "home market" argument played a great role in 
the earlier political controversies of the United States and in a 
slightly modified shape formed the basis of Carey's defence of 
protection. It is founded on the belief that protection is bene- 
ficial to agriculture as well as to industry, because the resulting 
increase of population and wealth will afford a larger market 
for the food and raw material of the immediate neighborhood. 
Moreover, the existence of industrial centres will enable the 



6o2 International Trade. [§ 230 

fanners to devote attention to the more perishable products to 
which transportation to a distance would be injurious or fatal, 
and will thus lead to more intensive and diversified farming. 
Finally, the development of the home market, it is said, will 
obviate the costly expense of transportation to distant countries 
and will thus increase the wealth of society in general. This 
argument has now been weakened, partly because the revolu- 
tion in the methods of transportation has materially lessened 
the importance of distance as a factor in cost, partly because 
the agricultural and mineral output of the United States has so 
vastly transcended the limits of domestic consumption that the 
prosperity of large sections depends upon securing an outlet 
for the surplus. It is the foreign market, not the home market, 
which has for several decades loomed large in the imagination 
of the fajmer. 

(3) More important of recent years is the "wages" argu- 
ment. In the United States this takes the form of ascribing 
to the protective system the chief efficacy in maintaining high 
wages. It declares that unless the tariff rates are elevated 
enough at least to compensate for the difference between the 
domestic and the foreign standard of wages, the former will 
drop to the level of the latter. To this the free trader is accus- 
tomed to rejoin as follows : (^a) The argument as advanced by 
the manufacturers is insincere, because they are interested not 
in high wages but in large profits, (^b) There must be a gross 
fallacy in the argument, because it assumes precisely the oppo- 
site form in countries where wages are low. Germany demands 
protection against England and Russia against Germany, on 
the ground that their low-priced laborers need to be protected 
against their more skilful and higher class competitors. In 
some countries protection is demanded because wages are high ; 
in other countries, because wages are low. If the Russian 
argument is good, the American argument must be bad, and 
vice versa. 

From the point of view of economic principle the following 
considerations may be advanced. In the first place, we must 



§ 230] Argument for Protection. 603 

not forget the distinction between high wages and high cost. 
Other things being equal, higher wages indeed connote higher 
cost ; but, as we learned above (§ 125), there may be an econ- 
omy in high wages. If high wages are an evidence of high 
productive efficiency and go hand in hand with improved 
machinery or superior natural advantages, high wages may 
mean low cost. It is precisely in those occupations where 
wages are highest in comparison with abroad, as in the produc- 
tion of boots, bicycles, cottons and wheat, that America is able 
to export successfully, showing that in these occupations at 
least high wages are no obstacle to cheap production. While, 
however, this consideration undeniably impairs the general 
argument, it does not successfully meet the point that there are 
other industries which would not be able to withstand foreign 
competition at home if the present wage schedule were main- 
tained concurrently with a withdrawal of protection. On the 
other hand, this proves only that these particular industries 
would not exist ; it does not prove that there would be any 
reduction in the rate of wages in the other industries which 
would continue or which might be newly started. Whether 
wages would fall would, so far as this point is concerned, 
depend upon the possibility of profitably employing in the old 
and permanent as well as in the newly started occupations 
the capital and labor hitherto utilized in the now abandoned 
industries. To the extent that this might not be possible there 
would indeed be a tendency for wages to fall, because of the 
diminished productivity of labor. It is clearly inadmissible, 
however, to argue that this must necessarily be the case. 

This leads to the consideration that the direct influence of 
protection on wages has been exaggerated. The rate of wages 
depends, as we know (§ 175), upon the location of the margin 
of productivity. Where natural resources are abundant, wages 
will be high with or without protection. The difference be- 
tween American and European wages was no less striking before 
the policy of protection was inaugurated in the United States 
than it is at present. In point of fact, protection was then 



6o4 International Trade. [§ 230 

demanded on the ground that American wages were high, and 
no one thought of ascribing the existing high wages to a non- 
existing protection. In the same way, wages in England have 
exceeded those in Germany alike during the periods of pro- 
tection and free trade. Moreover, a large part of industry in 
every country, as the railways, the building traded and the like, 
is necessarily local and not exposed to foreign competition. 
Wages in these occupations are hence not directly affected by 
any policy of foreign trade. It is only to the extent that pro- 
tection has an influence in relocating the margin of the pro- 
ductivity of labor in general by affecting the accumulation of 
capital and the efficiency of labor that it can exert any influence 
on wages. But this can be accomplished only if the protected 
industries actually involve the most profitable utilization of labor 
and capital. The wages argument in this form, however, dif- 
fers considerably from the common and crude formulation, and 
in reality fuses into the arguments to be mentioned below. In 
its crude form the wages argument is not convincing. Pro- 
tection explains the high wages in America as little as the low 
wages in Russia. Low wages are found under protection ; high 
wages under free trade. 

(4) The " infant industry " argument is the one which for 
a long time enjoy^ed the principal reputation, especially because 
Mill in his general defence of free trade made in this case an 
important concession. Although in its theoretic formulation 
usually ascribed to Friedrich List, it is found substantially in 
Alexander Hamilton's celebrated Report on Manufactures 
in the last decade of the eighteenth century, and more fully in 
the work of Daniel Raymond with which List had become ac- 
quainted during his sojourn in America. The theory asserts that 
just as children need the fostering care of their parents during 
the period of infancy, so the feeble and newly started industries 
need to be carefully protected during their years of weakness. 
It is conceded that this involves an expense, but it is claimed 
that it must not be considered an economic loss any more than 
the expense of raising a family is in the true sense a loss ; fur 



§ 230] Argument for Protection. 605 

both will more than pay for themselves when they reach matur- 
ity. In the case of industries this result will be brought about 
by the competition between the domestic enterprises, which 
will ultimately reduce the prices of the commodities to a point 
lower than that of the foreign wares with the cost of transpor- 
tation added. 

List formulated the theory a little differently. According to 
him production involves not only the turning out of definite 
commodities, but the creation at present of the possibility of 
turning out more commodities hereafter. The real economic 
function of society is not simply to produce goods but to pro- 
duce productive forces. Through protection, government 
achieves this educational end and thus trains the nation to 
industrial efficiency. National strength and power are the 
keynote of List's programme, just as national industrial inde- 
pendence was the objective of Hamilton and Raymond. List's 
work, The National System of Political Economy, bears the 
motto, Et la patrie et rhuinanite', — "my country as well as 
the world." The policy of government must therefore change 
with economic conditions. In the purely agricultural stage 
when a country, like the United States in the eighteenth cen- 
tury, is not yet ripe for industrial advance, protection would 
be folly ; in the fully developed industrial stage, as in England 
during the nineteenth century, protection would be equally 
inane ; but in the transition stage, as in the United States and 
Germany at present, protection is as necessary as it will ulti- 
mately be profitable. 

It will be recognized that List's argument differs from that 
of Carey and the home market theorists in two respects : it 
does not involve agricultural protection and it is confessedly 
temporary in character. With the lapse of every decade and 
the growth of the infant industries into lusty manhood the 
argument becomes continually weaker, and protection becomes 
less defensible as a permanent policy. This has led to the final 
and most recent argument. 

(5) The "variegated production" argument, as it might be 



6o6 International Trade. [§ 231 

called, accepts the one point in the Hamilton-List theory, 
but discards the other. It emphasizes the idea of national 
industrial independence, but maintains that the chief desider- 
atum is a well-rounded economic development, with a due 
consideration for all the various national interests. In a 
country like Germany, for instance, where the foreign com- 
petition of virgin lands would mean the ruin of domestic agri- 
culture, the increased cost of food and raw material, it is 
claimed, would be a cheap price to pay for the preservation 
of a healthy and prosperous farming class. On the other hand, 
a variegated industry is undoubtedly a sign of progress, and to 
the extent that it denotes a more efficient utilization of labor 
and capital and a help to enterprise, it will result in higher 
wages as well as greater profits, a better standard of life for 
the workman and a more prosperous condition for the manu- 
facturer. Even if domestic prices are higher than those of 
foreign goods, the loss to the individuals as consumers is more 
than offset by the gain that accrues to them as producers and 
as participants in the general prosperity. Thus protection is 
demanded as a permanent poHcy. 

231. The Argument for Free Trade. 

To these arguments the free traders make rejoinders in 
detail, all of them based on an affirmative position which, as 
elaborated by Adam Smith and the Physiocrats, is simplicity 
itself. International trade is like internal trade : the freer it 
is, the greater are the advantages to both parties. The idea 
that what one man or one country gains in trade the other 
loses is a fallacy scarcely less baleful than the idea that any 
one can get rich by impoverishing his customers. For in for- 
eign trade the other country is not so much a rival as a cus- 
tomer ; if by restricting imports we exclude their wares, by 
diminishing exports we necessarily prevent them from buying 
our wares. By allowing trade to be absolutely unfettered, every 
one is able to buy in the cheapest and to sell in the dearest 
market, and the gains of all will be at a maximum. Every 



§ 231] Argument for Free Trade. 607 

nation will thus be in a position to develop its natural advan- 
tages to the utmost, and the world's wealth will be enhanced 
because of the distribution of productive energies in the most 
economical fashion. Just as free trade among the separate 
commonwealths of the United States results in the most effi- 
cient utilization of economic forces, so free trade among the 
nations of the world will bring about the greatest development 
of wealth. Anything that obstructs this free trade is a step 
backward. 

According to this argument, protection is injurious in sev- 
eral ways, (i) It involves an unnecessary tax on the con- 
sumer, because it increases prices by the amount of the tariff. 
Protection is thus a robbery of the many for the benefit of the 
few. It is class legislation, and for that reason alone repre- 
hensible. (2) It means a maladjustment of economic forces. 
Like all other government interference, it savors of paternalism 
or socialism. (3) Protection does not really protect, because 
it destroys as many industries as it artificially fosters. Well- 
nigh every commodity is a raw material for some other com- 
modity. A high duty on iron interferes with the iron industry ; 
a high duty on iron products interferes with the machines 
constructed of such products ; a high duty on machines in- 
terferes with industries that use the machines. If protective 
duties were abolished, it is indeed possible that some indus- 
tries would disappear, but it is more than likely that other 
industries, now handicapped by high duties on the manufac- 
tures which constitute their raw material, would flourish. A 
tariff, therefore, means a dislocation, rather than a protection, 
of industry in general. (4) Protection involves political cor- 
ruption on a gigantic scale. One has but to witness the scenes 
in and about the committee room when a new tariff is being 
framed in the United States to realize that there exists no 
more potent engine of political demoralization. Section is 
pitted against section, interest against interest, business against 
business, and the final result is due to log-rolling and a series 
of " unholy alliances." (5) Protection is responsible for the 



6o8 International Trade. [§ 232 

persistence of national animosities, while retaliatory tariffs and 
commercial wars are often a prelude to the actual clash of 
arms. Free trade means peace and good-will ; protection 
leads logically to international hatred and bloodshed. The 
one implies the reign of humanity and brotherhood, the other 
of particularism and enmity. The one spells progress ; the 
other, retrogression. 

232. Conclusion. 

If now we attempt impartially to weigh these contending 
arguments, several points at once force themselves upon our 
attention. In the first place, some of the positions occupied 
by extremists on both sides are untenable. The protectionists 
err, as we have seen, in emphasizing the balance of trade ar- 
gument, the home market argument or the wages argument, 
at least in its crude form. The free traders err in claiming 
that protection is simply class legislation or socialism, or that 
it is responsible for national animosity. 

(i) As to class legislation, protection is supported in the 
United States by factory owners, laborers, and farmers alike. 
Some sections and some enterprises, indeed, may derive more 
benefit than others, but that is the inevitable result of almost 
all legislation. That in certain countries and in special cases 
indefensible preferences inimical to the common welfare shel- 
ter themselves under the aegis of a protective tariff cannot be 
used as an indictment of the system in general. Everywhere 
we must distinguish between use and abuse. Where popular 
government and constitutional safeguards exist, legislation in 
behalf of a particular class is not likely permanently to endure 
unless the community identifies the interests of that class 
with its own. (2) Again, to affirm that protection is pater- 
nalism or socialism is simply to call names, and to make 
the unwarranted assumption that the ideal of government is 
laissez /aire. (3) Finally, to assert that protection is the 
cause of national animosity is clearly to put the cart before 
the horse. 



§ 232] Protection Discussed. 609 

Abandoning these far from impregnable positions, there still 
remains an element of weakness in the arguments of both sides. 
Even the more moderate advocates of protection are apt to 
overrate its importance. The efficacy of protection, even at 
the best, is not unlimited. No degree of protection can make 
cotton growing permanently successful in Maine, or put the 
silk industry on a stable foundation in the desert of Arizona or 
the lumber district of Michigan. Protection must work within 
the limits of general economic advantages. Unless the artifi- 
cial environment can be created at a comparatively small cost, 
it is economically not worth creating. But what is done at 
even a small cost artificially will often come of itself after a 
time naturally, and sooner or later the permanence of the in- 
dustry must rest on these natural foundations. Just as the 
cotton mills which do an export business, and are therefore 
independent of protection, are now springing up in the South, 
so various industries are gradually creeping farther West with- 
out any protection against the long-established enterprises in 
the East. Before the foundation of the Australian common- 
wealth New South Wales and Victoria pursued opposite poli- 
cies in foreign trade, and yet their industrial development was 
approximately the same. Even if there had never been any 
protection in the United States, the time would undoubtedly 
have come when the mere accumulation of wealth and the 
growth of population would have superinduced the develop- 
ment of industry. 

On the other hand, the free traders fail to make allowance 
for an important element in the problem. The essence of free 
trade is cosmopolitanism ; the essence of protection is nation- 
alism. Free trade holds up to our contemplatiori the ultimate 
economic ideal, but fails adequately to reckon with actual 
forces. The universal republic is far in the distance, and the 
separate nations still have an important function to subserve in 
developing their own individuality and thus contributing dis- 
tinctive elements to the common whole. Legitimate compe- 
tition presupposes, as we have seen (§ 63), a relative equality 

J9 



GlO International Trade. [f 232 

of conditions ; as long as the growing nations of the world 
are in a state of economic inequality, we must expect and 
not entirely disapprove the effort on the part of each to 
attain equality by hastening its own development. Ulti- 
mately, no doubt, patriotism will be as much of an evil as 
particularism has now become ; but in the present stage of 
human progress patriotism is a virtue. Free traders often 
overlook the sound kernel in what seems to be the apple of 
discord. 

As long as nations continue to form the economic units it is 
not competent to argue from internal free trade to interna- 
tional free trade. The cotton mills in the South may injure 
their competitors in New England, but the nation will look 
on with equanimity, because it means a surplus production 
of wealth within the country. When, however, an industry 
in one country is menaced by the competition of another, it 
is no solace to the first that the world's wealth is being aug- 
mented at the cost of its own. Nations are not yet so 
unselfish. They calculate that even if protection carries with 
it certain incidental disadvantages, they stand to gain more 
than they will lose. Even as an engine of commercial diplo- 
macy a protective tariff is frequently of service. 

In the main, then, the conclusion would seem to be that 
under certain conditions a protective policy is relatively defen- 
sible. It may be conceded that in countries the mass of whose 
exports are of an industrial character protection is unwise. It 
may be taken for granted that when nations reach a state of 
comparative economic equality, protection will be unnecessary 
and even injurious, because if let alone each will then develop 
its own natural advantages. It cannot be gainsaid that protec- 
tion sets loose the selfish passions of individuals and classes 
and that it is responsible for its share of political greed and 
unsavory legislation. But when the economic resources of a 
country are not yet fully developed, it may none the less be 
desirable to accelerate the pace, in the interests of its own 
immediate national progress, with the idea that the contributions 



§ 232] Protection Discussed. 611 

of fully mature and economically well-rounded nations to the 
common wealth of the globe will in the long run exceed the 
gain from an uneven and one-sided evolution. 

So far as the United States is concerned it is scarcely open 
to question that the system of protection has somewhat has- 
tened the industrial development of the country. It has not 
created this development, which was bound to come sooner or 
later, and it is responsible for many incidental evils. It has 
contributed to political demoralization ; it has sheltered under 
its wing incompetent individuals who would have been elimi- 
nated to the common advantage by free competition ; it is 
maintained in several industries where it is no longer needed ; 
it has done its share in creating monopoly conditions in other 
industries ; and it is calculated in the near future to array class 
against class as the interests of some become more clearly favor- 
able to an unrestricted foreign market which can be secured 
only by letting down the bars of the tariff. And yet it is diffi- 
cult to escape the conclusion that protection has been on the 
whole a wise policy for the United States. Without it, it 
would probably have taken us somewhat longer to come to our 
own ; without it the immense amounts of capital invested by 
foreigners in starting industries on this side of the tariff wall 
would have been employed at home, to that extent retarding 
the diversification of American industry and the influences that 
contribute to the increased efficiency of labor ; without it the 
United States would not have entered so soon on its role as a 
world power ; without it, in short, the whole tempo of economic 
progress would have been slower. To those who deplore the 
feverish haste of modern life, this will serve as an additional 
objection to protection. To those, however, who desire to face 
industrial facts as they exist, and who realize that in the intense 
national rivalry of to-day, to stand still is to retrograde, the 
efforts of the statesmen who have guided the policy of the 
United States almost from the beginning will not seem to be 
such a tissue of errors or such a chain of mistaken aspirations 
as they are sometimes represented. As the United States 



6i2 International Trade. [§233 

becomes more and more of an industrial nation, seeking an 
outlet for its manufactures, it is indeed probable that the tariff 
will be gradually lowered, with advantage to all ; but he would 
be a hasty prophet who would predict any sudden or material 
change for a considerable time to come. 



CHAPTER XXXIII. 

TRANSPORTATION. 

233. References. 

A. T. Hadley, Railroad Transportation (1885) ; B. H. Meyer, Railway 
Legislation ititke Utiittd States (kjot,); H.R.Meyer, Government Regulation 
of Railway Rates (1905) ; E. R. Johnson, American Railway Transporta- 
tion (1903); A. B. Stickney, T/ie Railway Problem (1891) ; H. S. Haines, 
Restrictive Railway Legislation (1905); W. M. Acworth, T/ie Elements 
of Railway Economics (1905); W. Z. Ripley (ed.), Railway Problems 
(n. d., 1907) ; C. A. Prouty and W. D. Hines, The Regulatioji of Railway 
Rates (Amer. Econ. Assoc. Publications, 3d series, IV, 1903) ; President 
Roosevelt's Railroad Policy, Addresses by C. A. Prouty, D. A. Willcox, 
P. S. Grosscup and F. Parsons (1905) ; F. N. Judson, The Law of Inter- 
state Commerce and its Federal Regulation (1905); E. R. A. Seligman, 
Railway Tariffs and the Interstate Commerce Law (Pol. Sci. Quart., II, 
18S7 : some passages in this chapter are reprinted from this article) ; 
r. W. Taussig, A Contribution to the Theory of Railway Charges (Quart. 
Jour, of Econ., V, 1892) ; C. H. Cooley, The Theory of Transportation 
L. J. McPherson, The Working of the Railroads {\<)o-j) and Railroad Freight 
Rates (1909) ; Cleveland and Powell, Railroad Promotion and Capitaliza- 
tion (1909) ; Interstate Commerce Commission, Railways in the United 
States in igo2 (5 vols., 1903) ; United States Senate Committee on Inter- 
state Commerce, Hearings in Special Session (5 vols., 1905). 

234. Transmission of Intelligence — The Post-OfiSce. 

Transportation as an economic factor includes tlie transmis- 
sion of intelligence as well as the transportation of persons and 
commodities. The deeper influence of the modern media of 
transportation in overcoming the element of distance has been 
adverted to above (§ 19). The purpose of this chapter is to 
discuss some of the specific problems connected with actual 
charges. 

The chief media of the geographical transmission of intelli- 
gence are the post-office, the telegraph and the telephone. 

613 



6i4 Transportation. [§ 234 

Postal service in classic antiquity was almost exclusively for 
governmental purposes. In the middle ages it was largely a 
private enterprise carried on to serve the interests of the mer- 
chants, as in the Hanseatic towns, or in the case of the students 
living far from home at the Universities. It was not until the 
seventeenth century that a regular postal service was inaugu- 
rated in Europe. Mail coaches were first used by Pitt in 1 784, 
and the modern postal system was introduced by Rowland 
Hill's reform in 1840. The four points of the reform were 
uniformity of rate, penny postage, prepayment and the use of 
stamps. Up to that time adhesive stamps were virtually un- 
known, prepayment of postage was deemed an insult, and 
rates were graduated according to distance in conformity with 
the so-called zone system. In England the charge for a single 
thin sheet varied from 4^. for 15 miles to i2d. for 300 miles. 
A letter weighing two ounces from London to Cork cost gs. 
lid. — about eighty times the present rate. In America up 
to 1845 the rates were analogous — 6 cents to 25 cents per 
single sheet for distances from 30 to 400 miles. Hill con- 
cluded that the chief cost was ascribable to the handling of the 
mails at both ends, and the suggestion of uniformity carried the 
other schemes of improvement with it. By 1857 the reform 
was accomplished in the United States, and in 1874 the inter- 
national post was inaugurated. The use of universal postage 
stamps has, however, not yet been found practicable, owing to 
the diversity in the currency systems. 

The post-ofifice business is not confined to (i) the trans- 
portation of letters. In most countries it includes: (2) the 
parcels post, (3) the passenger post, (4) postal money orders, 
(5) postal collection of bills, (6) postal savings banks, (7) pos- 
tal telegraph and (8) postal telephone. In the United States 
all these additional functions, except the fourth and to a minor 
extent the second, are in private hands. But notwithstanding 
the restricted scope of the American post, the factors of 
national wealth, popular intelligence and immense distances 
have combined to make the postal transactions of the United 



§234] Transmission of Intelligence. 615 

States by far the most important, not only absolutely, but rela- 
tively to population. The expenditures for 1906 were over 
$182,000,000, involving a deficit of about $12,700,000 due 
partly to the growing demands for rural free delivery, and 
partly to the misuse by book publishers of the low rates on 
periodicals. 

Postal charges are usually based upon the principle of joint 
cost (§ 107). This involves the principle of particular value 
of service, as modified by general cost of service. Letters 
pay more than merchandise, merchandise more than books, 
books more than newspapers. Were the rates primarily based 
on particular cost, they would be inverted, for it obviously costs 
more to transport a newspaper than a light letter. The higher 
letter rate is imposed on the principle that inasmuch as the 
entire cost of the postal service must somehow be met, the 
letters can better afford to make a substantial contribution to 
this end than the newspapers. The receipt of the letter is 
worth more to the average correspondent than the receipt of 
the newspaper to the average subscriber. It is the value, not 
the cost, of the service, which is the controlling factor. Cost of 
service enters only as a minor ingredient, for letter rates in- 
crease with weight, speed and risk, in case of excess postage, 
special delivery and registered mails. 

The same holds good in a modified way of telegraph and 
telephone charges. Newspaper telegraph rates are lower than 
ordinary rates ; business telephone rates lower than residential 
rates. In only one important respect is there a difference. 
The telegraph and telephone charges in America are still cal- 
culated according to the zone system, long since abandoned 
in the post-office. This is due in part to the fact that the dis- 
tance element in cost is greater in the telegraph and telephone 
than in the post, but chiefly to the fact that the former are still 
conducted by private enterprises on the principle of maximum 
profits rather than of the greatest social utility. The question 
of government ownership will be discussed lat^r (§ 250). 



6i6 Transportation. [§ 235 

235. Railway Development. 

Of the modern media of transportation the railway is the 
one that presents the most difficulties. Canals, which devel- 
oped in England and America at the end of the eighteenth and 
the beginning of the nineteenth century, have lost their origi- 
nal function as the chief artificial medium of transportation, 
and are now of importance only in exceptional cases like the 
Erie and the Panama canals ; or where, as in some of the 
European countries, they are links between rivers or between 
the rivers and the sea. 

When Solomon de Cause first advanced the idea of employ- 
ing steam as a propelling power in 1 615, he was shut up in the 
mad-house as a hopeless maniac. Two centuries later, in 
181 2, when Colonel Stevens of Hoboken proposed to build a 
steam railway at far less cost than the projected Erie Canal, he 
was regarded as absurdly visionary and somewhat demented. 
And yet to-day, almost within the short space of a human life, 
we have a vast network of over half a million miles of iron 
roads encircling the civilized world, considerably over one- 
third of which are found in the United States. The table on 
the opposite page shows the railroad mileage of the world by 
countries on Jan. i, 1907. 

In the United States the railway mileage was 23 in 1830; 
2,818 in 1840; 9,021 in 1850; 30,626 in i860, and 52,922 
in 1870. The tables on pages 618 and 6x9 will give the salient 
details of the railwa)'s of the United States for thirty years. 

In Europe the railways were built to accommodate exist- 
ing traffic; in America they were constructed, for the most 
part, to create new traffic. In Europe the railway was the 
result of civilization, in America an outpost or harbinger of 
civilization, — a difference which has led to three important 
results : 

(1) The cost of railways in America is far lower than in 
Europe. In a new country the right of way is inexpensive, the 
terminals acquire value largely as a result of the railway itself 



s 235] 



Railway Development, 



17 



Moreover the exigencies of business do not necessitate the 
sqHdity of construction that is required in older communities. 



Europe. 

(jcrmany .... 
Russia (in Europe) 

France 

Great Britain and 
Ireland .... 

Italy 

Spain 

Sweden 

Asia. 

Russia (in Asia) . 

India 

Japan 

China 



.35.652 
35.2 1,1 
29,093 

22,152 

10,203 

9,102 

8,180 



5.664 
28,928 

5.013 
3.649 



North America. 

United States . 
Canada . . . . 
Mexico . . . . 

South America. 

Argentine . . . 
Brazil . . . . 

Summary. 

North America 
Europe . . . . 

Asia 

South America 
Australasia . . 
Africa . . . . 

Total . . . 



224,679 
20.597 
13.053 



12,775 

12,775 



258,995 
196,415 

54,655 
33,586 
17.715 
17.519 



580,278 



These conditions are reflected in the following table of average 
cost of railways per mile : 



England 

France 


$I90,000-$2I0,O0O 

150,000- 190,000 
1 10,000- 125,000 
100,000- 105,000 
60,000- 65,000 


Belgium 


Germany 

United States 



(2) The desire of the new communities to secure additional 
facilities led to the adoption in the United States of the com- 
petitive method in building railways, whereas in Europe it was 
recognized frorn the outset, or soon realized, that one railway 
between two points could in many cases perform as efficient 
service as two or three. What occurred at an early date in 
Europe is in process of accomplishment in the United States. 
The American railways are being rapidly consolidated into 
large groups, each of them serving a particular section. In 



6i8 



Transportation. 



[§ 235 



) 000 G^O 000 CO "^ N OsO t-^ > 



CO -n-vrj -H t-^ mco oc o 

^^O 00 « tv. t>. M Moo O 

• roOO u^sD t-^O MOO CT'Por^tN.O r*iro 



o ^s t>» c 



O O ' 



jO rt-w M u^ThmOTl-N 1000 vD "O ^ vD O^O « O \C "■ 

*^ "^ '^ "^ "^ "t; "^^^ *^ ^ ^ "i. ^"^ ^^ 9. 'i "^ '^ ^ '^ '^ ■■ 

- . £) -^ ThCO i^\0 -^ >-> f^M woo '-' O-O -ri-^O vO^0l>(SMmc 
O O lOvO O 000 M O OOO^O N t-^roLTiinO 0^0 O'^ O^MD t>, •■ 
^" m" cT" N~od O r^ tC U-) a> 10 i-h'md' d^ tC 10 m \oa5' C?Oo" iri c^" kT". " - -- 
O t>. t^ O tv.vD PI -H t^oo 000 t^wr^iO'i-i---^t^i-oooO 
00^ C^OO ■'^ M O" -^sO r^O lON mo N^O^O N m m uisO CO cTioo in O t^cc 

•^ 't? -^ invo o" t^ tC tCoo CO (>c?d cTooi^'^M'M'fcri-rM'N'fTco-^-^^i 



■*sO O 



n O ON c^ CT> U-) ro^i 

4 00 ■<*; t^'-o^oq^ o o ' 



u^OO 



) t>.^D t--. 



)0 t^t^CO-rhroCnui TJ-QC u^vJD t^OO t^, t 

coOOO Tt-foMvO 000 u^ro covO -^ f 
1 CO OvO 00 00 O CO MD O rv. "^00_ r^ i^OO "* i 

O r~>.MD OOM t^roiouio (>00 00 <> 
O N ro O^D CO t^^O M "^ O h- tN. ro03 
a^Omrt-vO M t>.OM rOMv£3 Oinro 



1 w o 



t O c 



n<X> i^O NvOO ■^u-ic^OO -^t^ Tl-00 O 00 



1- o CO moo .- 

1-00 sO O (N iM 



O 00 



i f^ o 



o o 





CO *-" 




M r-x 


vO ■-' O^vO ro r~> c*i ^ 














t~>. !>. 


en t>- 'sToo -+0 'I- en PI r^o 
















N M rn u-ioO N -^v^! I>.00 I- 


^n r^ 



l•^T^oo Th^ooo N ■■^tN.-^w or^'-^w om 

O O mi>.Ti-r^Tt-mq^[>. r-.oo ^ ^ ^ m 

1 tC in "^ "^ (>^ r^ foOO rroO^OM"-N 

N a> M t^^o 00 "^ f^°S. "^ "^ ^ ^J^ "^ '^ !2 

1 0\D O moo" m" -^ IT) "^00 10 10 N "-too "^ o 
100 O ►-< O -i-vO CO ro -^ m ro^D « J' ^-^ " -r 



1 O -^ CO "-< t^OO '^ ''I- O O 00 



r^ O O 000 



J^ t^ t^ t^ 


r) 


Vl' 




r*^, 


'ri^ 


M (vj 


n.S 




r^ 


in 


^^ 




M 


^\>joo 




ro 
































































































































































r^ 




















































































































































r^ 








■n- -^ iri\0 




















1 




t^ 


'- 




" '7 


t 


"J 


t^oo 













t^ 


00 0; o_ 


'7. 


•^ 


t>. hH 


"t 



1 u-i\0 \0 \0 ^ t^ t^ 



CO « fot^Ooo ooomcoN "!f 00 mM ^w -^^ts^-^j-M ( 
O mo-^roN iH Mco^ moi com'Tj-o Tj-inw O'i' 000 m 
MOO roM lO-TfiO'-'O mON o fooo 00 '<t- o 00 po u^oo t^ i 



tN ir>\D -^ ■^ ro I 

CO CO 00 t^ ■3- roo 

00 ^D 00 0^0 -^ t 

"1 C>\0 ^ -^00 - 



Tvb O f-» t^ r^ rvoo 00 00 00 CT- O O O 



t^CO O O <-" 

r^. !>. r^co c - 



. > -^ \ri\0 ^^oo 00 _ 

iCOOOOOQOOOOOOO 0^0^5^0000 



o O ►-< M ro -^ msD t>. 
sOOOOOOOOO 



oooooooooooooooooooodooooocoooooooco 00000000 



§ 235] 



Railway Statistics. 



619 







CO N t^ tN. vo t^ mco t-^ po fo 1- rcO f-^ »noo 0^ -1- -i- 'to !>.(■>.« t^oo m n 

re iri OsO lOQO sD t^ »0 fO U1CO ^tOO OX) - OU^t^ret^- N M t^-NOO- O 






if !^- 






sO N sD »/^ -^ hsvO Ot-^O "^N ■»i-0\0 ^00 t^oo t^v£i\0 WsD « t>.Tt\Ooo cT-r^rCnv 
u^^-.^-.TJ■mo f^O ^ r^r^OO r^'i-- -l-in oo OO -l-^l-Orj O -i-vrrfy-ir>^ 
uT*-Ou^u-.u^-r5 t^OO re- t-ico r^co r^ - r^ ri-O r- n n >>i w ^^ y^ 


^■ = 




E 


ir>sD d rCsd~ u-i (s CO i^co tCw tCt^N c5"cjc«5"c^rocrr) orCfocTcTNOindro 
00 00 t-^00 -i u-> t-^ t^ OsO ocoo- ■q-inu-jm- n t^ ttco -^oo n so rocr> -^ 




^W 


:age of 
Traffic 
igs to 
abilities. 




• "CO fOOO -«J-NOO'^00n00N -^00 -H tN.t^i-.0000 '^tvO M Tf M fO -*vO 


c 


9-SJ 


• •odd«wMH.o(>c5ddo'd^Mi-ioodcrso'MNcot^4'^4inu^ 


fe2«« 


•*. -c 


(SoHo 






H 








»« N '-' r>. N 00 N OMOO Tj-w u^-^O^OOO t^ »il^O ■* 000 ^O sO K vC f^ 












"^ N re mo re "^00 re re ^ tv re f^ 000 re ■^ sO r-N, re reoo 000 r^ re « "^ 


















'rt H 






0&:; 










H 






3 



N loso 00 u-ico bv ui -i-oo om-fM t^re-ooso t>.NO r^ 




OOoO\000'Hr^O(NaS'l-r^Nr^t^sOrei>.^Ooo"ofeO 



2 


c 






»r>GO m re t^O n- O -J- uiO >- 00 O lO -r O ui t^cc O - Q 00 t-^ 

O r^Ol^O-^ OOOioo- -sOOC O >- -t-^O O GO 'i-O 


z 






< 


&! 


sOsOm-l-in \ri\0 \0 ^N00 OO OO OX) OOOO •-''-'MMre^ "*sO O 


W 
u 


S 


"3 « a C « (2 « 


< 






H 




rerN.NO N t^-^or~^0»nfg n rece— OO ir)- rew - >- min— o -t'^O 


bt> 


Nrew O - 0-*-N0 reOO M t^ret^O "lO '^--^O Omreooo -<s-r^« nOoc 


c/l 















fa 








g 







O O -^O OOOmO -^0 "- "ire reO re "^ O O ■* r>.O0 O N ui{N O-tt^t^u^N 













fa 






» 






Si, 












S 


Mu->0(vi-ooci«r^ Oco 00 - N OO -too -H r^ N o in r^oo O 't- <n re o fe »i~i 














M - o O feo ce N 00 r-^oo 0"-tre-i-rec^»n-i-feopou^mij-i'i-r^u-. r^fOTj-n re 




di 






E 

















fa 






•d 








irj O <-i o -t" t^ reoo r^oo -j-cc reX) r^o O O N m O tv re OO r^oo re (^ - t^ 




H rt 


tv.in— OO ■■ O O reO M iM o reX) OnO rew moooo in u-iOO Ooo n "^ mO m 




is. 










1* 


tN r^ r^ r>» r%.oo OO ■-' - n Mre-*-»n mo r^ r^ t>. r^oo oocooo oooo -■ - n n 






^ 


loo t^oo o I- N re -I- mo t^OO O -■ N re ■+ uiO h«.00 O '-' N fO "^ "^o r>* 






>i 


000000O000000000000O00CO000OO00000X)0O0O00000O00G0 oooooooo 











620 Transportation. [§ 236 

the table on page 621 will be found the details of this process 
as it had developed in 1909, with the existence of five groups 
each of about 20,000 to 30,000 miles in length and with several 
others in process of formation. 

(3) In the United States the existence of keen competition, 
of rapid improvements in facilities, and above all of the growth 
of the long-distance traffic have conspired to bring about a re- 
markable progressive reduction in freight rates during the past 
thirty years. The facts are represented on the chart opposite 
page 620. As we have learned, moreover, from the table 
on page 618, the earnings have nevertheless increased faster 
than the mileage. There is now, however, a probability that 
this reduction has well-nigh reached its limit, and in fact since 
1900 there has been a slight advance. 

236. Nature of Railway Business. 

The railway business possesses three distinctive character- 
istics : it is more than a mere private undertaking ; it tends in- 
evitably to become a monopoly ; and, as in all large enterprises 
where the proportion of fixed capital is relatively great, there is 
a somewhat peculiar relation of constant to variable expenses. 

(i) When investors put their money into a railway, they 
are in a sense its owners. But a railway is not like a shoe 
factory. The state grants to a railway corporation some of its 
own sovereign powers, as the right of expropriation of private 
property; it regards the railway as its agent, and in return 
insists upon a large measure of responsibility to the public. 
Even the private railway, therefore, is a quasi-public institution. 

Railway rates and fares may hence be regarded from two 
different standpoints. In so far as a railway is a business cor- 
poration, it is a private matter : it may construct its tariff in 
accordance with general business principles ; it will endeavor 
to subserve primarily the interests of its owners. It will strive 
for the greatest possible profits ; and this course is legitimate 
and praiseworthy. But in so far as the railway forms the 
public highway, it is a public matter : the objective point now 



S3ivy aaHsnand do asvaBAv 



















































































































1 


































1 






































CM 


























1 










r^ 








































\ 








































, 






































/ 




































/■ 


































1 


1 


































y 


f 


































/ 






































|\ 






































.^>' 


































.<'^^ 




































^^ 


/ 




































"^Z 






































/ 






































i\ 


































i 


w 












































































t^" 








. 






























^ 




/ 


































.x^i 




T' 


— - 














T3 

C 














Jiir. 





— 


M^r*^ 


/ 














o 










\ 




\! 






















^ 




. 


— 


— ■" 




<<^. 


/i 








^ 
























^i^^ 


1 


1 






\ 


















-VA_f 


.<^^l 


^^i 


f 












^ 


\ 




















* 






1 






N^' 


^ 


c 

<D 
— U 

CO 












^^ 


->•" 
















^i^ 


r ' 










/ 


/'' 








1 








to 


. / 












/ 






















j 




^ 


^^ 


•^* 
























i 




























CO 


/^\ 


\ 


I 






























"""s^,^ 


































CM 


\^ 


1 


! 






























/I 


t 






















J 






! 




1 




1 



31IIAI a3d NOl b3d SnilAl 



© ^ 



o ;3 ■ S s 



Q =3 5 





































c 














o 


X i 

0> 1 










Ch 
CN 


c 1 










o 


in 1 

00 ( 










cw/l 








i./ 












// 












IX 












u7 


ILU 

n 










^/ll^ 










u 
.s 


J/ IlLU 












/ /';? 










1'- 










/ 


li <: 

ll ID 










\ 


% 


\13 










I 




^^ 










L 


,«* 










"' 


J 












*•« 














-7 






































































































































































































1 
















































i 





> ^ 

c8 ce 



a 2 



o 



o 



c3 



CD 

H 



0) 
O 






C3 



02 



P 

rl5 



© 



r^ ;; 



o 
o 



fl •'- 



© 



to 



•r1 © 

© rd 



d y 



rd 



o .;:i 



© 



^ £ -^ r-> 



© 

3 eS 



32 rd fH 



3 rd 



-d rS 



"S ^ 





1 

o 




© 


© 


o 






© 


c3 
© 


© 

rd 


© 






~\ 


-tJ 


=1 




-+J 


rt 


© 




1-1 


O 


o 




-(-3 


n 


© 


© 


o 


© 
-(-3 


■4^ 
00 


© 

> 

® 




o 

V 


o 

© 
a; 

O 

rd 


QO 

-4-3 

o 



,_l <-H fH 



c3 a 



o 

fcJD 

a 



=3 V3 



^ -^ .2 rS 
:3 ® -►^. o 






^ .3 ^ 



o 

• iH 

d 

■+3 
© 

d 

d 
© 

© 
o 



<! d 






.9 2 



r! o 



P "S 



j-i © 



^ --^ .;=; ® 



rd 



d 

rd 
■*^ 

rd 



d 



c3 

rd 



S^ d d 

S_| w ••-I 



O 

,d 



=3 






§ 236] 



Railway Consolidation, 



621 



Vanderbilt Group: 
New York Central Lines 
Chicago & Nortliwestern 

Harriman Group: 

Illinois Central 

Union Pacific System 
Southern Pacific System 
Baltimore and Ohio System 
Georgia Central .... 
San Pedro, Los Angeles and 

Salt Lake 

Delaware and Hudson . . 

Morgan Group: 

Southern Railway .... 
Cincinnati, Hamilton & Day- 
ton, incl. Pere Marquette 
Mobile and Ohio .... 
Queen and Crescent . . . 
Philadelphia and Reading, 
incl. N. J. Central ' . . 

Erie 2 

I Lehigh Valley .... 
/ Chicago Great Western . 
Small Southern Lines . . 

Pennsylvania Group: 
Pennsylvania System . . 
Norfolk and Western 
Western New York and 
Pennsylvania .... 
Long Island 

Gould Group: 

Missouri Pacific .... 

Texas and Pacific .... 

St. Louis Southwestern . . 

International and Great 
Northern 

Denver and Rio Grande, 
incl. Rio Grande Western 
and Western Pacific . . 

Missouri, Kansas and Texas 

Wabash 

Western Maryland . . . 

Hill Group: 

Great Northern 

Northern Pacific . . . 
1 Chicago, Burlington and 

\ Quincy 

( Colorado and Southern 



Miles. 

12,282 
9,361 



4,593 
6,osi 
9,956 
4,448 

1,915 

1,046 
845 



7,307 

3,716 

926 

1,174 

2,139 
2,236 
1,440 

',474 
1,000 



1,919 

667 
391 



6,474 

1,793 
1,470 

1,159 



3,534 

3,072 

2,516 

543 



6,743 
6,285 

9,024 
1-952 



Miles 

8,oos 
6,022 

4,365 
4,406 
1,230 



Moore Group : 

Rock Island 

Frisco System 

Walters Group: 

Louisville and Nashville 
i Alabama Coast Line 
I (incl. Plant System) . 
1 Nashville, Chattanooga 
I and St. Louis . . . 

Hawley Group: 

Chesapeake and Ohio . . 
Minneapolis and St. Louis . 
Chicago and Alton . . . 
Toledo, St. Louis & Western 

Iowa Central 

Des Moines and Fort Dodge 

Canadian Pacific: 

Parts of Main Line in tlie 

U. S about 

Minneapolis, St. Paul and 

Sault St. Marie (Soo line) 
Wisconsin Central . . . 

Independent Systems 
Chicago, Milwaukee and St. 

Paul 3 

Atchison, Topeka and Santa 

Fe3 

Seaboard Air Line .... 
New York, New Haven and 

Hartford 

Boston and Maine . . . 

Summary : 

Vanderbilt Group "^ . about 22,000 

Harriman Group . . " 29,000 

Morgan Group . . " 22,000 

Pennsylvania Group " 14,000 

Gould Group ... " 20,000 

Hill Group ... " 24,000 

Moore Group ... " 14,000 

Walters Group . . " 10,000 

Hawley Group . . " 5,000 
Canadian Pacific (in 

the United States) " 5,000 

Independent .Systems " 24,000 

Total .... " 189,000 

Small roads . . " 46,000 

Aggregate mileage . " 235,000 



1,844 
1,028 
9f.8 
451 
559 
1^6 



2,289 
1,1 ;8 



7,5'6 

9,815 
2,610 

2,047 
2,287 



1 Some of the stock of the Reading is owned by the N. Y. Central. 

2 The Erie is controlled jointly by the Harriman & Morgan interests. 

3 A large interest in the St. Paul & Atchison is owned by Harriman. 
^ An interest in the Vanderbilt group is now owned by Harriman. 



622 Transportation. [§ 236 

is the general welfare ; it aims not at the greatest possible 
profits, but at the greatest possible benefits ; it looks not at 
the interests of its owners, but at the interests of the public. 
The one point of view is individual, the other is social. The 
modern railway corporation shares both these characteristics : 
its nature is hybrid. To subordinate the public to the private 
element is plainly inadmissible. Entirely to engulf the private 
in the public element is equally unfair, so long as the railway 
is not owned by the state. In the United States two princi- 
ples, at all events, have been firmly established during the last 
generation. The one is that the railway is more than a mere 
private business; the other is that the capital invested by 
private individuals in railway enterprises does not lose its 
claim to a just remuneration or to equal protection before 
the law because of the fact that the railway is a quasi-public 
institution.^ 

(2) The railway tends sooner or later to become a mo- 
nopoly. So far as the local traffic is concerned, this is true 
from the outset. The chief consideration here is the possibility 
of increasing production without proportionate increase of plant 
or capital. The traffic on a railroad may be doubled without 
the necessity of duplicating roadbed, track, terminals and 
general expenses. Several lines paralleling each other at every 
point would not benefit the public and would certainly ruin 
each other. But even in long-distance traffic much the same 
is true. The theory of the beneficence of competition depends 
on the postulate of the transferability of capital. In case of 
failure the unsuccessful competitor deserts the enterprise, but 
the railway, once started, has come to stay ; it may change 
hands, but it will not, and in many states it cannot, be aban- 
doned. A bankrupt individual may be disregarded as a com- 
petitor ; a bankrupt railway is a more dangerous competitor 
than before, because the receiver need not earn anything to 

1 These leading cases were the Granger Cases (Munn v. Illinois), 
94 U. S. 113 (1876), and the Nebraska Rate Cases (Smith v. Ames), 169 
U.S. 466(1898). 



( 236] Railway Competition. 62'^ 

)ay interest or dividends. There is hence every inducement 
or the railways to prevent competition ; and the attempts will 
ary from more or less loose agreements to complete consoli- 
lation. As Gladstone said at the time of the English discus- 
ion in 1844: competition between railways is like a lovers' 
[uarrel : breves inimicitiae , amicitiae sempiternae. Moreover, 
his tendency cannot be permanently arrested by legislation. 
Ve may prohibit railway combinations, but we cannot prevent 
hem. If we make them illegal, we simply make them secret, 
ir cause them to change their form. 

The public again profits in some respects no less than the 
ailways. The curse of free building of American railways has 
teen the system of parallel and often needless lines. An addi- 
ional road between two terminal points frequently represents 
much wasted capital, and the necessity of earning profits on 
bis swollen capital aggravates the burden on the public, 
'ompetition between railways is supposed to be responsible 
Dr the facilities and low charges of American railways : in 
loint of fact its influence has been much exaggerated. The 
ompetition, while it lasts, is of a desperate character, and each 
ne strains itself to the utmost to secure the business that is 
ften sufficient only for one. Charges may indeed be lowered 
emporarily, but the strenuous effort to secure traffic gives birth 
D the very worst abuses of railway management, — secret per- 
onal discriminations and immoderate local discriminations, 
"he changes are violent, the conditions unstable. Reduction 
f rates is sometimes carried to such a point that not even 
perating expenses are met. The railway wars, which are the 
Dgical and extreme manifestation of railway competition, 
xhaust the companies and afibrd but a dubious relief to the 
lublic. Lowness of charge is outweighed by instability of 
harge. The reduction itself is, moreover, of an ephemeral 
haracter. Continuance of low rates means universal railway 
lankruptcy ; escape from ruin is possible only through com- 
lination. If competition be beneficial to the public, it is a 
emporary benefit ; if railway wars, on the other hand, throw 



624 Transportation. [§ 237 

trade into confusion and engender the most aggravated abuses, 
the cessation of competition is a boon to the pubUc. As was 
pointed out in § 63, competition in ordinary business is the 
" life of trade," but competition in railways might be called 
the death of trade, or at all events the death of honest and 
impartial treatment of traders. 

(3) Railway outlays are divided into fixed charges or inter- 
est, and operating expenses. While the proportion which fixed 
charges bear to total expenses varies with each line, it may be 
said roughly that it is usually from forty to fifty per cent. In 
other words, well-nigh half the expenses are constant or inva- 
riable. They do not change with the amount of business 
transacted. 

' The operating expenses are divided into (^) maintenance 
of way and stations, (^b) maintenance of equipment, {c) con- 
ducting of transportation and (d) general expenses, such as 
office, law and insurance expenses. Of these (r) and, to a 
smaller extent, (^) fluctuate almost in proportion to business 
transacted ; but {^a) and still more (rt') will change only very 
slightly with the traffic. The proportion of each of these four 
classes to the whole will vary with the widely different charac- 
teristics of each line ; but it may be safely affirmed that in 
general about one-half of the operating expenses are constant 
or invariable. 

The total constant expenditures of a railway are thus the 
fixed charges plus one-half the operating expenses. In other 
words, a large majority of railway expenses are irrespective of 
the amount of business. They remain the same, notwithstand- 
ing the increase or decrease of the traffic. The effect of this 
state of things on the determination of actual rates will be seen 

in § 239. 

237. Principle of Railway Charges. 

Whether the railway be owned by the state or by a private 
corporation, there must, up to a certain point at least, be a 
similarity in the principle of charge. For the interests involved 
are so enormous, and the particular benefits to the patrons so 



§ 237] Railway Charges. 625 

separable, that no country has yet proposed to run its railways 
free or below cost. Some states like Prussia make large profits 
out of their government railways ; others as in Australia en- 
deavor just to cover the cost ; but none has attempted to make 
up a railway deficit by taxation. 

The principle sometimes advanced as an ideal is that of cost 
of service. A fair criterion in ordinary commodities is cost of 
production ; why, it is asked, should it not be applied to rail- 
way transportation? 

(i) Obviously, however, this cannot mean the cost of the 
particular service. In the first place, such cost is impossible of 
ascertainment. There is a wide disparity in the cost of car- 
riage on the same line according to the changing conditions 
under which the service is performed. At one time the greater 
portion of the freight may be carried over the whole line ; at 
another the local business may outweigh the through traffic, so 
that the capacity of the rolling stock is not fully utilized. At 
one time the traffic may move in great part in one direction 
and the number of " empties " returned may be abnormally 
large ; at another time there may be far more back-loading 
and a more even distribution of traffic. At one time the trains 
may be started with full loads ; at another, they may be half 
filled. The proportion of paying freight to dead weight, or 
the amount of the tare, is of considerable importance. So that, 
even if it were feasible to construct a tariff based on the cost 
of service of each particular transaction, it would be of no avail 
unless the amount of freight remained an unalterable quantity. 

(2) Secondly, if rates were based on cost of service, most 
of the work performed by the raflways would come to a stand- 
still. It costs immensely more to transport a given value of 
heavy goods like cOal than an equal value of silk. If rates 
were fixed according to cost of carriage, the expense of con- 
veyance would so vastly exceed the prime cost of the coal as 
effectually to bar its use except in the immediate neighborhood 
of the mines. In the same way it costs so much more to bring 

wheat from North Dakota to New York than from Troy to New 

40 



626 Transportation. [§ 337 

York, that unless a lower ton-mile rate was granted on the North 
Dakota business, there would be no market for it at all in New 
York. Individual cost of service can hence not possibly be a 
criterion of railway charges. 

(3) If therefore anything is meant by cost, it must be joint 
cost. As we have seen, however, in our general discussion of 
value, joint cost refers only to the cost of all the services in the 
aggregate, and affords no criterion as to the principle govern- 
ing the separate services. To ascertain this we must revert to 
an anterior law of value, namely, the law of marginal utility. 
In other words, the principle of charges is not the cost of the 
individual service, but the value of the individual service. 

The object of a railway is to increase its traffic and to de- 
crease its expenses. This it finds can be best attained by lower- 
ing the charges on certain classes of goods, or on the same 
classes to different localities. But this is equivalent to saying 
that what influences the manager is not the cost, but the value, 
of the service. This practice in railway parlance is called 
"charging what the traffic will bear," — an unfortunate ex- 
pression, and liable to much misconception. If we mean by 
the principle " charging what the traffic is able to bear," it is 
correct ; but if we mean " charging what the traffic can be 
made to bear," it is incorrect. Charging what the traffic will 
bear, rightly understood, simply serves as an excuse for re- 
ducing rates on low-class traffic because it cannot bear higher 
rates. The phrase is a bad one, because it may be twisted 
into meaning that the greatest possible charges on high-class 
goods are also legitimate. Correctly interpreted, it justifies 
lower charges on certain kinds of business ; incorrectly inter- 
preted, it seems to justify extortionate charges on other kinds 
of business. 

The attempt to make the theory of joint cost the funda- 
mental explanation of railway rates is, moreover, erroneous for 
another reason. Prices are fixed at the point of cost of pro- 
duction or joint cost, as we know, only when the products are 
competitive products. There is always a marginal producer 



s 237] Principle of Railway Charges. 627 

who sells at cost price without any profit. But in monopolies 
there is no marginal producer, and, as we have seen (§ no), 
the relation of price to cost is far more indirect. Price may 
be continually above cost, the difference being the monopoly 
profits. Price in such cases is fixed according to the principle 
of monopoly maximum returns, which is nothing but charging 
what the consumer can afford to pay. The charges on each 
monopoly by-product will be put at the highest price consist- 
ent with greatest sales or profits, and not necessarily propor- 
tionate to cost of production. As we have learned in the last 
paragraph, however, a railroad is in the long run a monopoly. 
Railway charges, therefore, are fixed not by any principle of 
cost, but by the principle of monopoly profits, that is, charg- 
ing what the traffic will bear. 

This also explains the analogy that is frequently drawn be- 
tween railway charges and taxation, with the idea of ability or 
capacity to pay. Taxation is compulsory, but payment for a 
monopoly of a necessity of life (like railroad charges in the 
present stage of business activity) is in one sense equally com- 
pulsory. The principle of charging what the traffic will bear, 
in any monopoly, has reference to the ability of the patron to 
pay. The monopolist is indeed not moved by ethical consid- 
erations, but the price that he charges depends upon what the 
purchaser can afibrd to pay. Justice in taxation requires that 
a man shall pay in some proportion to what he can afford ; the 
fixing of monopoly price depends on what he thinks he can 
afford : at bottom, there is a real analogy between the cases. 

Some object to the value of service principle as the ex- 
planation of railway rates, because they hold that value means 
intrinsic utility and grain and coal would then be charged 
more than silks and spices. This is to revert to the old fallacy 
that value and utility are identical. The slightest acquaintance 
with the modern theory of value suffices to dispel this objec- 
tion. When we say that railway rates are fixed by value of 
service, we mean that the marginal utility of the service is 
definitely estimated by the shipper; that if the rate exceeds 



628 Transportation. [§ 238 

this estimate, the commodity will not be sent ; and that a 
different estimate may be put on each shipment or commodity. 
The marginal utility of the service fixes the prices of all 
commodities ] but it is only in the case of competitive pro- 
duction that this is equivalent to joint cost. Thus the theory 
of joint cost, in so far as it is true at all, is a subordinate part 
of a more general rule ; and to the extent that the railroad is a 
monopoly, the theory becomes less and less true. The dis- 
pute will easily be avoided as soon as it is recognized that 
cost of service or joint cost is simply a variation of value 
of service, and that the theory of marginal utility (which is 
nothing but value of service) is the fundamental explanation 
not only of railroad charges but of all prices. 

238. Classification. 

Charging according to what the service is worth results in 
the two fundamental principles of classification and discrimi- 
nation. Classification is due to the fact that the same service 
has a varying value when rendered to different commodities. 
Discrimination (/. e. local discrimination) is due to the fact 
that the same service has a varying value when rendered to 
different places. Whether the same service has a varying 
value for the freight of different persons, and may thus give 
rise to personal discrimination, is a question to be treated by 
itself. 

Value of service influences classification in a double way, — 
it puts the same articles into different classes, it puts different 
articles into different classes. The first method is illustrated 
by the distinction between freight and express traffic. In the 
United States the general classification applies only to freight 
traffic. In the rest of the world, where separate express com- 
panies are unknown, the rates are classified according to this 
distinction, as in England, where they are known as goods and 
parcels rates. In the same way passenger fares on express 
trains are often higher than on ordinary trains. 

Far more important, however, is the classification of different 



§238] Classification of Freight. 629 

articles into different categories. Cost of service indeed in- 
fluences classification to a minor extent in so far as the articles 
differ in bulk, shape, risk, direction, or regularity of shipment, 
or as passengers use a Pullman or a plain coach. Actual rates, 
however, are mainly influenced not by cost of service, but by 
what the service is worth. The main point is the development 
of the traffic. We must keep in mind the distinction drawn in 
§ 209 between the constant and the variable expenses. If the 
freight or the cheap passenger business, like immigrant traffic, 
can be secured at rates which will more than cover the variable 
expenses, — the actual hauling and a proportionate part of the 
station expenses, — it will pay the road to take this business, 
because a contribution, however small, is thereby made to fixed 
expenses. These would have to be met at all events. A small 
contribution to constant expenses is better than none at all. 
Yet to apply this low rate to all business would ruin the 
company. 

Classification again benefits the public. The meagre surplus 
over hauling expenses on the cheap goods contributes, if ever 
so little, to the fixed expenses, and diminishes to this extent 
the amount which it is necessary to raise from the remaining 
traffic. If we had no classification, not only would we not 
have cheap meat and cheap wheat, but the charges on the dear 
goods would be higher. It reduces the rates on the cheap 
goods immensely and the rates on the dear goods moderately. 
The principle of classification is the first corollary from the 
distinction between constant and variable expenditures . 

To uphold the legitimacy and necessity of classification is, 
however, quite another thing from attempting to palliate unde- 
niable abuses. Classification plays only a very slight role in 
passenger traffic because, especially in democratic countries, 
one man is considered as good as another ; but the freight 
classifications, most of which have grown up in a hap-hazard 
way, are full of inconsistencies. There are two problems in 
freight classification, — to secure uniformity between different 
railways and to secure uniformity between shippers. 



630 Transportation. [§ 238 

(i) At the outset every road had its own classification. 
With the growth of consohdation and agreements classifica- 
tions applicable to connecting and competing roads were 
elaborated. In a small country like Italy it has been found 
possible to construct a uniform tariff for the entire country. 
In the United States the difficulties arising from the conflicting 
interests of different sections have been found insuperable. 
The South demands a specially low rate on cotton, the West 
on wheat, the Pacific slope on fruit, and so on. There are 
now four chief classifications, — the official (in the North and 
East), the Southern, the Western, and the Transcontinental 
classifications. Cotton piece goods, for instance, are in class 
one in the Western, in class three in the official, and in class 
five in the Southern classifications. What the railroads, how- 
ever, are not able to accomplish by mutual agreement will 
probably be effected in no distant future by legislation.^ If 
this is done, however, the greatest care will have to be taken, 
when prescribing a national classification, to provide for an 
adequate number of special or commodity rates outside of the 
regular classes. 

(2) The American classifications, although far superior to 
those of a few decades ago, are still often lacking in uniformity, 
in stability and in justice. If the railway is a quasi-public in- 
stitution, these wide powers of fixing the classes cannot be put 
in the hands of private individuals or corporations as sole arbi- 
ters. To imply with many of our eloquent railway officials that 
there is an identity of interests between the railway and the 
shippers is unfortunately not borne out by experience. To 
demand, on the other hand, a rigid law prescribing all details 
would impute to our legislators a knowledge which they cannot 
possess. To cure the abuses of classification by Congress 
designating administrative agents who, under the spoils system, 
shall fix the classification, would be a jump from the frying pan 

1 A history of the attempts to secure a national classification will be 
found in Interstate Commerce Commission Reports, second, fourth, and 
eleventh reports. 



§239] Personal Discrimination. 631 

into the fire. An escape from the dilemma seems to be outlined 
in the principle of advisory boards or consultative councils, 
which have been established in Germany, Italy and Japan. 
These councils represent the commercial interests, and the 
classification finally adopted is the result of a conference, and 
often a compromise, between the shippers and the railways. 

239. Personal Discrimination. 

As opposed to classification a discrimination may be defined 
as an inequality in the charge for hauling a like quantity of 
similar articles or individuals for an equal distance in the same 
manner. All discrimination is either personal or local. 

While differences in rates based on classification are in a 
sense legitimate, it is impossible to find any principle on which 
to base personal discriminations. Personal discriminations in 
passenger fares take the form of free passes ; personal discrim- 
inations in freight rates occur in a multiplicity of ways. They 
are beyond doubt the most flagitious abuses of arbitrary railway 
management. 

Allowance for quantity or making a lower charge for larger 
shipments is indeed, within certain limits, defensible. It is then, 
however, really a matter of classification, and may be upheld in 
the same way as the distinction between slow freight and ex- 
press business. The difficulty, however, is to select the unit 
above which the rates shall be the same to all. Shall it be the 
pound, hundredweight, ton, car load, cargo lot, or train load? 
Usually the car load is taken as the dividing line, and as such 
does not excite much dissatisfaction, although even this may 
sometimes work injustice to the small shipper and cause inde- 
fensible preferences. 

But if this comparatively unimportant difference be only 
partially justifiable, the vastly greater discriminations which 
cannot even claim cost of service as an ostensible reason are 
indefensible on any theory whatever. To build up one man's 
business at the expense of another's can never be acknowledged 
a legitimate function of common carriers. The railroad ad- 



632 Transportation. [§ 240 

vocates sometimes assert that a business firm makes wholesale 
rates less than retail rates and gives special figures to different 
customers. Why is not the same principle applicable, they ask, 
to the railroad business ? They utterly fail to perceive that the 
railroad is not simply a private business, but a public trust ; 
that a merchant is not bound to treat his customers equally, 
but that a railroad exercises public functions, is invested with 
public rights and therefore has public duties. The wholesale 
principle or allowance for quantity, when carried to this ex- 
treme, becomes utterly untenable. 

Personal discriminations, then, cannot be upheld on any 
theory. They must be stopped at all hazards. But how? 
Whatever be the affirmative answer, we are now prepared at 
all events to exclude certain negative replies. To rely on free 
competition as a remedy is absurd. Personal discriminations 
are most glaring when competition is most active. Cut rates 
and rebates are never so common as during railway wars. The 
great mass of personal discriminations are due not to the voli-. 
tion of the railway managers, but to the stress of competition 
and the desire to attract business. The Interstate Commerce 
Law, which in one section attempts to maintain competition by 
prohibiting railway pools and in another section forbids per- 
sonal discrimination, is endeavoring to secure two diametrically 
opposite ends. If we strengthen competitipn, we inevitably 
increase personal ■ discrimination. 

240. Local Discrimination. 

Local discrimination may arise in two ways, (i) The road 
may desire to extend its traffic in commodities coming from a 
distance. If they are to be carried at all, they must be trans- 
ported at less than regular rates. Hence arises the necessity 
of a distinction between local and through traffic. Goods 
coming from a distance must be treated in the same manner 
as cheap goods. Local discrimination is like classification. 
The distant freight is the cheap freight, the near freight is the 
dear freight. Local discrimination of this kind is in principle 



§ 24o] Local Discrimination. 633 

legitimate. The long-distance traffic, by making a contribution 
to constant expenses, reduces the local rate as well. It is the 
immense long-distance traffic in the United States which has 
enabled the American railways to reduce their charges, local 
as well as through, far below the European level. The abolition 
of local discriminations of this kind would level up, not level 
down. 

(2) Local discriminations may arise from competition at 
the junction points. The competition may be due to cheaper 
water transportation, to a foreign railway or to a better equipped 
or shorter domestic railway. A lower rate to the competitive 
centre is the sole condition of the retention of the competitive 
traffic. 

It is sometimes stated that local discriminations are in prin- 
ciple reprehensible because they remove geographical advan- 
tages ; and it is claimed that the true principle is that of the 
equal mileage rate. This argument, however, is not convincing. 
There is no such thing as an inviolable geographical advantage. 
There are no vested rights in situation. One town may be 
connected with the coast only by a turnpike ; another farther 
distant may have the good fortune to see a railway built 
through its limits. Has the former any cause to complain 
because it is robbed of the benefits of its hitherto advantageous 
situation? The object of all improved means of communica- 
tion is, in fact, to annihilate distance, to minimize differences 
in situation. Maintenance of original geographical advantages 
would render impossible all but local business in the vast mass 
of commodities ; it would again turn our Western fields into 
barren wastes. Differential rates widen the field of supply; 
they increase the specialization of wants and create the possi- 
bility of satisfying these wants, so characteristic of modern 
society. Opposition to local discriminations arises from view- 
ing solely the interests of the producer ; rational economics leads 
us to consider also the consumer. Opposition to differential 
rates is based on the supposed welfare of a particular class or 
section of producers; a wise national economy will ponder 



634 Transportation. [§ 240 

over the interests of the whole community, irrespective of sec- 
tional jealousies. If local discriminations are so arranged that 
distant producers are enabled to compete with local producers, 
the latter may indeed see their profits curtailed, but the former 
will see their profits increased, and the consuming public as a 
whole will evidently gain. 

This does not, however, justify all differential rates. The 
abuses have often been outrageous, the methods undeserving 
of palHation. Local interests have been disregarded, and the 
discriminations so conducted as to ruin whole businesses or 
towns in order to build up others. It is not necessary to as- 
cribe illicit motives to the railway managers. They have often 
been forced into unjust discrimination by the stress of compe- 
tition and the instinct of self-preservation. But railway officials 
commit a great mistake in calling all local discriminations just, 
because they are the effect of competition, precisely as the 
demagogues err in opposing undeniably valid discriminations 
and at the same time upholding- competition. Competition is 
made to cover a multitude of sins. Railway profits and public 
interests do not always go hand in hand. The possible diversity 
of interests renders some forms of governmental supervision 
imperative. 

It is indeed true that, in the main, rates should increase 
with distance or mileage. Some extremists propose to apply 
to railways the postal principle of making a uniform charge 
irrespective of distance. This, however, completely overlooks 
the fact that in the post the chief item of cost is the handling 
at each end and that the expense of transportation itself is an 
insignificant fraction of the whole ; while in the railway, on 
the other hand, a far greater part of the cost, especially in 
longer distances, is the mere hauling expense. To disregard 
distance would require such an immensely high average rate 
as to make even wagon transportation cheaper for short 
stretches. The postal principle is utterly impracticable as 
well as theoretically erroneous. 

But while cost increases with distance, it does not increase 



§ 24o] Short-Haul Laws. 6^^ 

proportionately to distance, precisely because of the relation 
of constant to variable expenses. Hence distance rates do 
not imply, as some demand, equal mileage rates. Both the 
cost and the value of the service increase less rapidly than the 
distance. Even in the relatively simple passenger business 
mileage rates are used only for comparatively short distances ; 
the fares to the more distant competitive centres are almost 
always less than mileage rates. As soon, however, as we have 
any derogation from the principle of equal mileage, we have a 
local discrimination. 

The simplest limitation on the practice of local discrimi- 
nations is the enactment of the short-haul principle. This 
prescribes that the charge to any intermediate point shall not 
exceed the aggregate charge to the final point. Although 
there is no vested interest in geographical situation, it be- 
comes an anomaly to charge to a way station the rate to a 
competing point further on, plus the additional rate from 
the competing point back to the way station. This is an 
inversion of the principle of distance. The attempt, however, 
to enforce such a hard and fast rule is perilous. As long as 
the law cannot be applied to waterways and to foreign com- 
peting railways as well, the anomalies cannot be entirely re- 
moved. Unless the railways from the East to San Francisco 
met the all-sea rates, or the Canadian rates to the coast, they 
would lose their through transcontinental traffic, and would 
have to raise their intermediate rates as well. While therefore 
the Interstate Commerce Law accepts the short-haul principle, 
it permits the commission to make exceptions ; and among 
the nicest duties imposed on the commission is that of deter- 
mining when an exception is legitimate. 

But if even this comparatively simple matter requires such 
delicate handling, what shall be said of the great mass of other 
discriminations, where the charge to an intermediate station is 
relatively, without being absolutely, greater than the charge to 
a more distant point? Among the perplexing problems that 
arise are the following : Is it legitimate to make export or im- 



636 Transportation. [§ 



!40 



port rates less than domestic rates, that is, to charge less be- 
tween the two points for the same commodities when the haul 
is only a part of the distance to a foreign country? Is it rea- 
sonable to make group or blanket rates, that is, to put all 
stations within a radius of a few tens or even hundreds of miles 
in a group and make the same charge to all? Is it just to make 
allowance for " milling in transit" or "floating cotton," that 
is, to allow grain to go from the fields to the mill, or cotton 
from the plantation to the compresses, or logs from the forest 
to the saw-mill, and then to proceed to the point of destina- 
tion on its proportion of a through rate rather than the local 
rate? Is it defensible to follow the "basing point" system, 
whereby local rates are based according to the relative dis- 
tance of the local points from the competitive points, the rate 
being ascertained in each case by adding to the through rate 
to the basing point the local rate from that point back to the 
local point? Is it permissible to make differentials between 
cities — as, for instance, on grain, flour, and provisions, where 
the domestic rates from the West to New York are two cents a , 
hundredweight higher than to Philadelphia, three cents 
higher than to Baltimore and two cents lower than to Boston, 
with different figures for ex-lake grain (grain from the West 
which leaves Buffalo after storage, on a new and independent 
rate) and still different figures for export rates ? 

These are only a few of the embarrassing questions which 
call for decision. Three points are, however, obvious : (i) No 
hard and fast rule can be laid down. AU the circumstances 
and conditions must be taken into consideration, and these 
may change from day to day or season to season. (2) It is 
not only a question of railway practice, but of business and 
local rivalry. (3) The final decision of such delicate and im- 
portant matters must not be left to the shippers or the railways, 
but must be intrusted to some higher authority, which should be 
not only expert in the transportation business, but completely 
impartial as between the railways and the shippers, on the one 
hand, and the rival sectional interests on the other. 



§ 24i] Railway Regulation. 637 

241. Railway Regulation. 

The preceding discussion has made it clear that some form 
of railway regulation is necessary. There are five different 
methods of dealing with railways, (i) The government may 
own and manage the railways, as in Prussia, Australasia and 
many other British colonies. (2) The government may own 
the railways, but leave the operation in private hands, as in 
some of the roads in North Carolina and all the roads in some 
minor European countries. (3) The railways may be owned 
by private companies, but operated by the government, as until 
recently in Italy. (4) There may be mixed ownership and 
operation, either with the idea that the competition of the 
state railways will regulate the private companies, as formerly 
in Belgium, or without any such intention, as at present in 
Russia, France, India and many other countries. (5) The 
railways may be left to private ownership and management, as 
in England and the United States. 

The general discussion of government ownership or manage- 
ment, and the special reasons against it in the United States, 
may be left to a later chapter. Points one to three may there- 
fore be omitted. On the fourth point the experience of Belgium 
has conclusively proven that a government railway is not an 
effective regulator of private companies, and that instead of 
the government railway drawing the private companies up to 
its level, the government railways, on the contrary, are invari- 
ably pulled down by the stress of competition to the level of 
the private companies, with personal discrimination and ille- 
gitimate preferences of all kinds. This leaves as the practical 
problem in Great Britain and the United States point five, 
or the governmental supervision of railways which remain in 
private hands. 

In Great Britain, where the situation is much simpler 
because of the sraallness of the country and the extended 
sea-coast, competition was eliminated at an early date, and 
personal discriminations have been correspondingly rare. The 



638 Transportation. [§ 241 

chief questions have been those of relative rates between lo- 
calities and maximum rates on different classes. After several 
more or less feeble attempts at regulation a railway commis- 
sion was instituted in 1873, with judicial powers. Their find- 
ings as to facts are final ; as to law, they are reviewable by a 
higher court. In 1888 a law was enacted giving the Board of 
Trade power to suggest maximum rates, and during the years 
1891-94 Parliament accepted the recommendation and en- 
acted maximum rates. Finally, in 1894 it was provided that 
no railway should increase its existing rates within the max- 
imum without affirmatively proving to the satisfaction of the 
Railway Commission that the increase was justifiable. It has 
been claimed that this provision has seriously interfered with 
the progressive reduction of rates which would naturally come 
through the increase of business ; for the freedom to reduce a 
rate, and the lack of freedom to restore it if found to be un- 
profitable, will prevent even the most venturesome railway 
manager from making a hazardous experiment. 

In the United States the early attempts at regulation were 
confined to the separate states. It was not until 1887 that 
national supervision began with the enactment of the Inter- 
state Commerce Law. The law was the result of a compro- 
mise. It endeavored to maintain competition, and prohibited 
pools, but it did not try to lay down a rigid short-haul rule. 
Not only was pooling forbidden, but under the Sherman Anti- 
Trust Law of 1890 it was subsequently held that even railway 
traffic associations are illegal. The author of the anti-pooling 
clause — Senator Reagan, of Texas, who later served on the 
railway commission of his native state — subsequently con- 
fessed that his original opinion had been erroneous, and the 
Supreme Court of the United States, in declaring the illegality 
of traffic associations, conceded that they were economically 
beneficial. 

The Act of 1887 prohibited unjust and unreasonable charges, 
and instituted the Interstate Commerce Commission to enforce 
the law. Unlike its English predecessor, the American com- 



§ 241 ] Interstate Commerce Commission. 639 

mission is not a judicial court, and its decisions are not final 
even as to facts. Moreover, it had been settled by the Supreme 
Court that its powers were limited to declaring a particular rate 
illegal, but that it had no power to declare what the rate should 
be in the future. The question which was still in debate in 
1905 was as to whether rate-making powers should be conferred 
on the commission. 

As to this it must be remembered that the principal com- 
plaints are personal discrimination and relatively unreasonable 
rates. So far as the eradication of personal discrimination is 
concerned, the efficacy of rate-fixing powers is more than 
doubtful. Personal discriminations are always secret, and can 
be secured in a multiplicity of ways through rebates, under- 
billing, private car charges and illicit agreements of other 
kinds. The Elkins Law of 1903 has imposed as severe pen- 
alties on such discriminations as it is well possible to devise. 
The surest way of abolishing personal discriminations is by 
removing the competition which is their cause. To seek to 
frustrate railway agreements, and at the same time to prevent 
rebates, is to blow hot and cold at once. With the continued 
enforcement of the anti-pooling and anti-trust laws personal 
discriminations will be inevitable ; and it is only to the 
extent that the laws are not actually enforced to-day that per- 
sonal discriminations are less than they formerly were. No 
rate-fixing powers will avail one jot. 

As to relatively unreasonable rates the great argument 
against granting the commission rate-fixing powers is that it 
may hamper railway development and create the danger of 
sectional strife. In a country which is still in the early stages 
of its economic development, and where conditions are chang- 
ing from day to day, to give to a small body of men, however 
expert, the right to declare rates for the entire country would 
be to impute to them a wisdom and capacity which they can- 
not possibly possess. The mistakes which they are sure to 
make will to that extent retard railway facilities and jeopardize 
commercial progress. Furthermore, under prevailing Amer- 



640 Transportation. [§ 241 

ican conditions, it will be difficult to keep the commission 
invested with such far-reaching power free from political influ- 
ences. As soon as political influences make themselves felt, 
the commission may be forced, in self-defence, to do what 
Germany has done of recent years, — that is, to approach as 
near as possible to a distance tariff, and thus to abandon the 
advantages of the value of service principle, which has con- 
tributed so materially to the low rates and the economic pros- 
perity of the United States. 

Thus there are great perils on both sides. To leave the 
powers of the commission as they now were would be to with- 
hold from them the opportunity of rectifying some undeniable 
abuses ; to confer upon the commission great powers would be 
to impart to our system of railway rates a rigidity which would 
make us lose on the one hand what was gained on the other. 
The escape from the difficulty would seem to be a compromise 
between the private and the public idea. Leave to the rail- 
ways the right of fixing rates in first instance ; give to an ad- 
ministrative body the power of instituting inquiries, reporting 
facts and of making preliminary decisions ; put in the hands of 
a judicial body the duty of passing in last instance upon the 
reasonableness of the charge. Only in some such way as this 
can there be a reconciliation of the railways and the public 
which will tend to insure justice without impairing efficiency. 

The Act of 1906 marks another step toward this end. The 
commission is made more clearly an administrative body and 
has been empowered to alter unreasonable and unjust rates by 
an order to remain in force, unless suspended or set aside by 
the courts. Its authority has been extended to express, sleep- 
ing-car and pipe-line companies, and a uniform system of 
accounting (which went into effect in 1907) has been prescribed 
for all common-carriers. Thus the railways are becoming in 
fact, as well as in name, public-service corporations. 



CHAPTER XXXIV. 

INSURANCE. 

242. References. 

A. H. Willett, The Econotnic Theory of Risk and Insurance (Columbia 
Studies, XIV, No. 2, 1901), and The Cost of Life Insurance (Polit. 
Sci. Quart., XX, 1905) ; C. Walford, Itisurance Cyclopcedia (5 vols., 
1871-1880); and Insuranct Guide and Handbook (3d ed., 1900) ; W. A. 
Fricke, Insurance, A Text Book {1S9S) ; T. E. Young, hisiirance, A 
Practical Exposition (1904); A. J. Wilson, The Business of Insurance 
(1904); A. C. Campbell, Insurance and Crime (1902); A. Manes, 
Versicherungswesen (1905) ; fouriial of the Institute of Actuaries (1850-); 
Tratisactions of the Actuarial Society of A tn eric a (1889-). 

Special Classes of Insurance: F. Martin, History of Lloyds [i^yb); 
M. M. Dawson, The Business of Life Insurance (1906) ; W. Gow, Marine 
Insurance (1S95) ; W. Alexander, The Life Insurance Company (1905); 
B. J. Hendrick, The Story of Life Insurance (1907); F. H. Kitchin, Prin- 
ciples and Practice of Fire Insurance (1904) ; P. Mayet, Agricidtural In- 
surance ( 1893) ; E. MacNeill, A Study of Accidents and Accident Insurance 
(1900); D. E. Schloss, Insurance against Unemployment (1909). 

243. Nature of Insurance. 

The economic life of man is subject to uncertainty. Even 
the old adage that there is nothing sure in life save death and 
taxes is incomplete, because even though the uncertainty 
does not attach to the fact itself, it does attach to the time 
of the occurrence or to the magnitude of the phenomenon. 
Insurance is a device to remove the economic consequences 
of uncertainty. 

From one point of view it might be claimed that there is 
no such thing as chance. Everything that happens in the uni- 
verse is obedient to law ; that is, it is the result of a cause. If 
we had full knowledge of all causes, we could predict every 
event with accuracy, and thus eliminate such a thing as a 
41 641 



642 Insurance. [§ 243 

chance occurrence. For if we previously knew that it was to 
happen at that moment, it would not be a chance. On the 
other hand, the word chance may be used in a slightly different 
sense. If a pack of cards has been well shuffled, it is an even 
chance that we turn up at the first deal a black or a red card. 
Chance here means the degree of probability of an occurrence. 
The more numerous the occurrences, the more regularity will 
there be in their happening ; so that when we have very large 
numbers, there is even such a thing as a law of chance. 

The degree of uncertainty, however, is not the same thing 
as the degree of probability. When the probability is zero or 
small, the uncertainty indeed is zero or small, and there is no 
chance or little chance. The uncertainty, however, increases 
only up to a certain point. The uncertainty is greatest when 
the chances are even, and then diminishes as the chances in- 
crease, until the uncertainty disappears, when the probabil- 
ity of occurrence becomes infinite. Certainty means either 
no probability or no improbability ; after the point of even 
chance has been passed, probabihty increases as the uncer- 
tainty decreases. 

The term risk may be applied to either probability or un- 
certainty. If there is only one chance in a hundred of a man's 
success in an enterprise, we say that he is taking an immense 
risk. In that case the probability of failure is immense, but 
the uncertainty very small. In ordinary economic life, how- 
ever, men will rarely enter upon any business enterprise unless 
they think that they have at least an even chance of success, 
and usually not unless they think that they have more than 
this even chance. In other words, they will not act unless 
they feel that although both the probability of loss and the un- 
certainty increase together, both may be guarded against. 
Putting it in another way, the risk with which economic 
activity commonly concerns itself is the degree of uncertainty 
rather than the degree of probability. The need of protection 
against risk grows, therefore, with the degree of uncertainty 
which in economic actions increases as probability increases. 



§ 243] Nature of Insurance. 643 

Uncertainty is clearly a disadvantage, which every prudent 
man desires as far as possible to eliminate. This can be ac- 
complished in three ways : by avoidance, by prevention, or by 
assumption of risk. 

(i) In certain cases involving the investment of capital, he 
can avoid the risk by joining to the economic transaction in 
question another which counterbalances it. This, as we have 
learned (§ 155), is one of the functions of speculation, as in 
the ordinary " covering transactions " of the cotton, or wheat, 
or foreign exchange " futures." The scope of such speculative 
transactions, however, is comparatively restricted. 

(2) He can prevent or greatly reduce the degree of risk. 
If he wants to be assured that his house will not burn down, 
he may make it absolutely fire-proof. That, however, involves 
an immense expense which he perhaps cannot afford. If this 
were the only alternative, he would make the house fairly sub- 
stantial, putting capital into it up to the point where the ad- 
ditional cost would in his opinion outweigh the chance of loss 
by fire. An ounce of prevention is worth a pound of cure ; 
but two pounds of prevention are not worth a pound of cure. 
In modern society as a whole, far greater sums are spent in 
preventing losses of all kinds than formerly ; in fact, govern- 
ment expenditures are to-day to an overwhelming extent of a 
preventive rather than of a remedial character. But that is 
because we realize that the cost of a board of health is insig- 
nificant when compared to that of a plague, or the cost of 
education slight in comparison to the economic and political 
losses due to popular ignorance. Municipal ordinances may 
compel individuals to erect substantial structures, but the 
prevention of risk can profitably go only to a certain point. 
Moreover, no matter how elaborate the precautions, there are 
certain catastrophes against which no human ingenuity can 
avail. Earthquake, lightning, flood and tempest will destroy 
property just as accident, non-employment or illness will de- 
stroy personal income. Something more than prevention is 
requisite. 



644 Insurance. [§ 244 

(3) He can face and assume the risk, but reduce it by 
combining his own risk with that of others into a group and 
distributing the losses to the group as a whole. In this way he 
makes what was uncertain sure. This method, hence, is called 
assurance or, more commonly in modern times, insurance. 



244. Grovrth of Insurance. 

Insurance is in its important manifestations a modern phe- 
nomenon, and a result of industrial capitalism. It is due to 
the fact not so much that men are now more anxious to avoid 
risk than formerly, but that risks have increased to a prodigious 
extent. It seems at first blush absurd to say that modern civi- 
lization, which implies prudence and forethought, should at the 
same time mean increased risk. The contrary assertion, how- 
ever, which assumes that economic progress implies the dimi- 
nution of risk, is clearly an error. Progress and increased risk 
are not incompatible. Uncertainty is assuredly to be depre- 
cated ; but if the saving of cost due to a new invention or a 
new economic process exceeds the risk of loss due to the greater 
uncertainty, society is justified in adopting it. An express train, 
for instance, involves more risks than a slow freight, but is none 
the less an indication of progress. It is only when an eighteen- 
hour train is put on between New York and Chicago that it 
becomes a question whether the risk does not outweigh the 
advantage. Up to that point, at all events, it is either directly 
or indirectly an economic gain. The increase of risk in mod- 
ern times is therefore ascribable to the spirit of invention and 
the better utilization of the forces of nature. Risk and progress 
increase together. The pace of modern life is rapid ; competi- 
tion and the factory system have engendered uncertainties, 
whereas the leisurely mediaeval methods of customary price and 
handicraft industry meant a slow and certain humdrum. In- 
dustrial capitalism has virtually created risk as well as the way 
of meeting risk through insurance. 

The beginnings of insurance are to be sought in three 



§ 244] Growth of Insurance. 645 

entirely distinct germs : primitive mutual help, the classic 
bottomry loans and the mediseval rent charges. 

(i) Well-nigh all primitive societies practise some methods 
of collective responsibility. Thus in the earliest Teutonic 
Frithgilds we find mutual responsibility for loss by murder, 
fire, theft, or loss of cattle. Again, in the mediaeval guilds 
the principle of joint guarantee was almost universal. The 
same principle in one sense underlies the modern mutual 
insurance company. But it would be hazardous to attempt to 
trace any direct connection between these early groups and 
the modern business enterprises. 

(2) The first ^ permanent and well-authenticated form of 
business insurance is that of the only kind of enterprise in 
which capital was employed on a large scale, namely, in over- 
sea trading. Ancient and mediaeval insurance started with 
commercial capital. The marine insurance of the middle ages 
was an outgrowth of the ancient system of bottomry loan, 
known in classic Rome as fcemis naiiticum or peciuiia trajec- 
titia. If the owner of a vessel needed funds, he could secure 
a loan on condition that it be repaid with interest, provided 
the ship were not lost or did not fall into the hands of enemies 
or pirates. The bottomry contract was therefore in a certain 
sense an embryonic insurance, but with the peculiarities that the 
insurance money was paid in advance and that it included a 
loan as well. In point of fact the loan, rather than the insur- 
ance, was the principal thing. When a new form of contract 
was devised in the Italian towns of the thirteenth and four- 
teenth centuries, whereby the payment was made after, and not 
before, the loss of the ship, the loan element disappeared and 
the contract became one of insurance. The person who as- 
sumed the risk was called the underwriter of the risk. In 



^ The only instance of insurance, pure and simple, in classic antiquity 
that has come down to us is that mentioned by Boeckh, Public Economy 
of Athens, where Antigenes of Rhodes undertook for a payment of eight 
drachmas per slave to make good his price, as estimated by the owner at 
the time of his escape. 



646 Insurance. [§ 244 

England these marine underwriters or insurers met in the 
coffee-houses, one of which at the end of the seventeenth 
century happened to be owned by Edward Lloyd. This grad- 
ually drew to it more and more of the underwriters, until by 
the middle of the next century virtually all the marine insur- 
ance was done at "Lloyd's." 

(3) The final source of modern insurance can be traced 
more particularly in connection with the growth of life insur- 
ance. It is true that marine insurance itself after a time de- 
veloped in part into a kind of life insurance, for it gradually 
became the custom for the underwriter to insure not only the 
ship and its contents in the shape of commodities, but also the 
cattle and the lives of the passengers themselves. Far more 
important, however, as a source of life insurance was the 
mediaeval system of rent charges. These were utilized to 
evade the rigor of the usury laws. Loans were made to in- 
dividuals on the transfer of lands for a definite time, during 
which the lender enjoyed the fruits. These fruits were in lieu 
of the interest which was prohibited by statute. Gradually, 
however, instead of transferring the use of the lands them- 
selves, there was substituted in its stead the obligation to pay 
a rent or annuity, called a rent charge, because the annual pay- 
ment was charged on the rent or produce of the land. These 
annuities were either for life or for a term of years. Life an- 
nuities were granted, after a time, even by the church through 
the societas sacri officii. 

From decade to decade, however, the speculative element 
developed. The transaction became popular. It was techni- 
cally not a loan, but a transfer of land. It yielded large 
returns, — eight to twelve per cent on the capital invested. 
More important than all, it was generally accompanied by the 
condition that the principal should be repaid only if the 
annuity-payer (the borrower) should die before the annuitant. 
In the course of time the payment of a capital sum was dis- 
pensed with, but an annuity (premium) was paid every year and 
the capital was handed over only in case of the death of 



§ 244] Varieties of Insurance. 647 

the premium payer. Thus the system became practically 
indistinguishable from life insurance. Other mediaeval methods 
akin to modern insurance were the ransom and the marriage 
portion annuities. In the first case payments were made to 
individuals to provide against possible capture by brigands. 
In the second case the church took loans in the shape of 
annuities from individuals without paying interest, but with the 
obligation to pay the capital when the daughter married. In 
the middle of the seventeenth century an Italian by the name 
of Tonti introduced the principle of survivorship in a group and 
thus gave rise to the modern Tontine annuity. 

Out of these small origins the modern system of insurance 
has developed. The most important forms of modern insur- 
ance are marine, life and fire insurance. Marine insurance 
has not changed much in character for several centuries. But 
life insurance could not develop on a large scale until the scien- 
tific principles underlying it were thoroughly understood. 

In every insurance the (gross) premium payable by the 
beneficiary who takes out the insurance is composed of two 
parts, — the so-called loading and the net premium, or sum 
which is mathematically necessary for the creation of a fund 
sufficient to enable the company to pay the policy in full when 
it falls due. The loading is the amount added to the net 
premium to provide for expenses and for contingencies, like 
loss of invested funds or failure to earn the anticipated inter- 
est. The important constituent naturally is the net premium. 
In life insurance this is the joint product of the theory of 
probabilities, the experience of vital statistics and a calcula- 
tion of interest rates. The so-called mortality table shows 
how many in a given large number of persons will live to 
each age, and consequently how many will die at each age. 
It is impossible to predict in what year a particular individual 
will die, but it is possible to state with approximate accuracy 
how many out of a given number will die at any specified 
age. On the basis of such a mortality table it is a simple arith- 
metical computation to ascertain the premium necessary to be 



648 Insurance. [§ 24, 

charged at any given age in order to create a fund which will 
accumulate to a fixed point at a given rate of interest. The 
first attempt to apply mathematical principles to life annuities 
was made in 16 71 by Jean DeWitt, grand pensionary of Hol- 
land and West Friesland. The first approximately correct 
mortality table was constructed by Dr. Edmund Halley in 1693. 
As these tables became more precise, life insurance developed 
as a business. The first enterprise started on a really scientific 
basis was the Equitable Society in London in 1 762. In America 
the first society was the New York Life Insurance and Trust 
Company, inaugurated in 1830. 

The centre of marine insurance is still in England. But with 
the uncertainties, the vicissitudes and the magnitude of modern 
business life in the United States, the American life insurance 
companies have far transcended all others in importance. Of 
the amount of life insurance in force in the world in 1905 four 
American companies — the Equitable Life, the Mutual Life, 
the New York Life and the Northwestern Mutual Life com- 
panies — had between a third and a quarter of the entire 
amount. The figures are as follows : 

The four American companies . . . $5,680,316,147 
All other life insurance companies in 
the world $13,862,232,600 

Total $19,542,548,747 

Wherever uncertainty can be removed we find insurance. 
In addition to life, fire and marine insurance, there have 
developed in recent years cattle insurance, hail insurance, glass 
insurance, windstorm and tornado insurance (first in America 
in 1 861), aqueduct insurance (against the risk of damage from 
a break in the aqueduct or water mains), boiler insurance, 
burglary insurance, elevator insurance, automobile insurance, 
credit insurance (through the credit indemnity companies), 
guaranty insurance (against the risk of breach of trust by offi- 
cials), accident insurance, illness insurance, out of work insur- 
ance, old age insurance, insurance against damages to others 



§ 245I Theory of Insurance. 649 

by defects in the insurer's premises, and loss of rent insurance. 
We even find such remarkable examples as machine insurance 
(against the risk of damage through the carelessness of work- 
men), strike insurance, crop failure insurance, gate receipts 
insurance (in sporting matches) and insurance of the voice of 
a prima donna. In Russia there is a company which insures 
individuals against the economic consequences of political per- 
secution, and in England and America there has even been 
talk of insurance against divorce and insurance against twins. 

245. Theory of Insurance. 

The essence of insurance is the effort to diminish the risks 
of uncertainty. Insurance is productive, that is, it involves an 
increase of wealth, because it lessens the social costs of risk. 

We must be careful not to confuse the loss due to the uncer- 
tainty with the loss due to the occurrence itself. The occur- 
rence is bound to happen. Death will come, fire will consume, 
the tornado will strike. In some cases the probability of the 
occurrence or the amount of the loss may indeed be some- 
what lessened by preventive action. A good police force will 
diminish burglary, an efficient fire department and a good 
building code will decrease fire losses, carefully devised factory 
laws will lessen accidents. In all these cases, however, we have 
to deal with prevention, not with insurance. Insurance takes 
the fact itself for granted ; it does nothing to eliminate the 
occurrence. The loss is hence the same, whether we have 
insurance or not ; the house is burned and there is less wealth 
than before. 

There is, however, in every case an additional loss, due not 
to the occurrence but to the uncertainty. This can be most 
clearly seen in the investment of capital. The ordinary man 
will not assume risks unless he is remunerated for it. In the 
case of the entrepreneur, indeed, the assuniption of risk is one 
of the elements in enterprise, because he expects in the end to 
derive profits sufficiently large to compensate for possible 
immediate losses. But when a capitalist loans funds, and there 



650 Insurance. [§ 245 

is any special degree of risk connected with the transaction, it 
is a familiar fact that he will increase the rate of interest by a 
corresponding amount. This increase in the interest rate is an 
addition to the expenses of the borrower. If the risk is not 
peculiar to the individual borrower, but is connected with the 
entire class of transactions in question, and if the borrower 
utilizes the loan in productive enterprises, the increase in the 
interest rate becomes an addition to the cost of the product 
and thus to the price ultimately charged to the consumer. In 
other words, if the uncertainty could be eliminated, the price 
of the commodity would be lower and there would be a corre- 
sponding gain to the community as a whole. What is true of the 
investment of capital is true of the employment of any produc- 
tive factor. Wherever there is an economic action — whether 
it be the application of labor, the employment of capital, or the 
utilization of any form of wealth — uncertainty results in a 
lower degree of productivity or in a smaller surplus of utility 
than would be the case if the uncertainty were obviated or 
decreased. Insurance minimizes this uncertainty and is 
accordingly productive of wealth. 

Like transportation, insurance falls under the head of ex- 
change of wealth, while exchange, as we know, is itself a spe- 
cies of production. Improved transportation reduces the cost 
of having a commodity in one place become a more valuable 
commodity in another place ; improved insurance reduces the 
cost of having the uncertainty of the future change into the more 
valuable certainty of the present. Transportation overcomes 
the disadvantages of space ; insurance overcomes the disad- 
vantages of time. Transportation is productive because it 
increases space utilities; insurance is productive because it 
increases time utilities. 

It will be asked, however, how does insurance minimize un- 
certainty? The answer is, through the combination of risks. 
This is a result of the law of probabilities. If we have accu- 
rate statistics of fires, for example, for a term of years and 
take the number of fires with a given number of houses during 



§ 245] Combination of Risks. 651 

that period, we get an average. If the figures in any year 
corresponded exactly to the average, there would be a cer- 
tainty in the number of fires, and the only uncertainty would 
be as to which house would burn. In point of fact, however, 
in any particular year there will be a variation from the aver- 
age. According to a well-established law, the probable varia- 
tion increases only as the square root of the number of cases. 
If there are a hundred times as many houses, there will be only 
ten times as much probable variation from the average loss. 
Hence the larger the number of cases, the less will be the uncer- 
tainty as to the amount of loss which will be borne by the group 
as a whole. Insurance combines the risks into a group, and 
thus reduces the element of uncertainty. The risk of the group 
is less than the sum of the risks of the individuals who form 
the group. 

An individual can manifestly not afibrd to insure himself, 
because the insurance fund which he would be obliged to accu- 
mulate would be out of all proportion to his possible earnings. 
An immense corporation, like a steamship company with hun- 
dreds of vessels, may practise self-insurance with a better chance 
of success ; but the advantages of having the insurance business 
entrusted to a separate class is so pronounced that self-insur- 
ance is extremely rare. The great benefit of an insurance 
company is not only that the risks are combined, but also that 
they are transferred to a class who can afford to make a special 
study of the problem, and who can thus reduce the cost of in- 
surance by displaying their ability to estimate uncertainties. 
Whether the company is a stock corporation or a mutual 
company is of importance only as to the ultimate distribution 
of the profits of the enterprise : in the one case, as in the 
other, however, the management of the business is confided 
to a class of experts. The more adept the insurance com- 
panies, and the more scientific their methods, the closer will 
be the correspondence between the preparation for, and the 
fact of, loss and the smaller will be the accumulation of the 
necessary insurance fund, the lower will be the insurance pre- 



652 



Insurance. [§ 246 



mium, and the greater will be the net gain to the community. 
Insurance properly conducted is the opposite of gambling. It 
any one takes out an insurance policy, he frees himself from 
an existing uncertainty and transfers the risk to some one who 
is more quahfied and ready to assume it ; if he makes a wager 
with another, the newly created uncertainty attaches to both. 
Insurance is the transfer and reduction of risk ; gambling is the 
creation and increase of risk. 

24& Methods and Regulation of Insurance. 

The primary function of the insurance company is to reduce 
uncertainty. Insurance companies as business enterprises, 
however, seek to enlarge their profits in other ways. 

(i) Sometimes insurance companies endeavor to combine 
the business of insurance and of prevention. Strictly speak- 
ing, the insurance premium is the payment made to the com- 
pany to induce it to assume the risk. But fire insurance 
companies, for instance, conduct the fire patrol system, and 
organize for protecting coverings in case of fire ; and the cost 
of this is added to the insurance proper and is included in the 
so-called premium. In reality, however, as we have seen, this 
is prevention, not insurance : it tends to reduce the loss through 
the occurrence, not the uncertainty of the occurrence. In the 
same way certain fire insurance companies make a lower rate 
when the insurer engages to use certain precautions, like bet- 
ter buildings, automatic fire-sprinklers, etc. This again is not 
insurance, but prevention. 

(2) Life insurance companies do an immense business not 
alone as insurance companies but as media of secure invest- 
ment. As a consequence there is a great variety in the kinds 
of policies issued. The ordinary form is the annual dividend 
policy. Here, by the time the second annual premium is pay- 
able by the policy holder, a dividend is declared on the pohcy. 
This may take the form of a " reversionary addition " which is 
added to the amount of the insurance, the premium remaining 
the same ; or it may be a " cash dividend," necessarily smaller, 



§246] Methods of Insurance. 653 

which can be used to reduce the premium, the amount of the in- 
surance remaining the same. With every year this dividend 
grows, and after the lapse of several years the policy acquires a 
"cash surrender value," that is, a sum which the company will 
pay to the holder on the surrender of the policy. In lieu of 
the annual dividend policy, the holder may prefer a deferred 
dividend policy, according to which a cash sum or its equivalent 
will be paid at the end of a term of years. Thirdly, he may 
choose "a policy without any dividends at all, the so-called 
non-participating policy, under which he obtains his insurance 
at a lower rate in consideration of the fact that he waives all 
claims to dividends. Again, the policy may be either a life 
policy payable upon his death or an endowment policy, whereby 
the insurance is payable to the beneficiary at the expiration of 
a certain period. These endowment policies may, like the 
others, be issued either on the annual dividend or the deferred 
dividend plan. Finally, the policy may be a term policy or 
a limited payment life policy, where the premiums do not con- 
tinue for life, but are limited to a definite number of years, 
after which the policy becomes " paid up " and remains in 
statu quo until the death of the insured. Moreover, there 
may be all manner of combinations of these various kinds of 
policies, such as continuous instalment endowment, yearly 
renewable term, return premium, and double endowment 
policies. 

It is especially in such cases as this, where the accumulated 
surplus becomes so enormous, that the wider problem of public 
policy assumes considerable importance. In the case of banks, 
as we know, legislation is needed to protect the reserve. In 
the case of insurance which is primarily a method of making 
accumulations to protect the great mass of beneficiaries, the 
need of regulation is even more obvious. Almost all of the 
American states have a legislative code and an administrative 
department designed to control the various classes of insurance 
companies. 

Xhe recent scandals connected with the financial manage- 



654 Insurance. [§ 246 

ment of the leading insurance companies in the United 
States, have emphasized the necessity of a more carefully 
devised legislation and a more effective supervision calculated 
to enforce responsibility and to guarantee solvency. In some 
countries, as in Australia, the public is so solicitous of the in- 
terests of the policy holders that the government has even 
assumed the management of the insurance business, at least in 
part. Radical as such a step may seem, it is at all events in- 
disputable that there is both room and need for careful public 
scrutiny and effective social supervision of a business that 
has intertwined itself with the very roots of modern eco- 
nomic life. 



Part IV. 

Conclusion. 

CHAPTER XXXV. 
GOVERNMENT AND BUSINESS. 

247. References. 

H. C. Adams, The Relation of the State to Indicstrial Action (Am. 
Economic Association, Publications, 1, 1886) ; E. W. Bemis, ed., Miitiicipal 
Monopolies {i?>gci) ; Major Darwm, Municipal Trade (1904); B. Shaw, 
The Common Sense of Municipal Trading (1904) ; J. S. Nicholson, Prin- 
ciples (1901), bk. V, ch. iv ; The Facts of Municipal Ownership, Report of 
the Commission of the National Civic Federation (3 vols., 1907) ; Street 
and Electric Railways, 1902 (United States Census Bureau, Special Report, 
1905) ; The Merchants' Association of New York, Inquiry into the Con- 
ditions relating to the Water Supply of N^ew York (1900) ; Municipal Opera- 
tion and Public Franchises, a series of articles (Municipal Affairs, VI, 
No. 4, 1903). 

Socialism: T. Kirkup, History of Socialistn (3d ed., 1906); J. Rae, 
Contemporary Socialism (4th ed., 1908) ; A. E. F. Schaetile, The Quintes- 
sence of Socialism ( 1889) ; W. Sombart, Socialisfn and the Social Movement 
in the Nineteenth Century (189S) ; R. C. K. Ensor, Modern Socialism 
(1904); R. T. Ely, Socialism and Social Reform (1894); E. V. Zenker, 
Anarchism, A Criticism and History (1898) ; J. Spargo, Socialism (2d ed., 
1909) ; M. Hilquitt, History of Socialism in the United States (1903) ; V_ 
G. Simkhovitch, Marxism and Socialism (Polit. Sci. Quart., 190S-1910). 

Subsidies: R. Meeker, History and Theory of Shipping Subsidies (\m. 
Econ. Assoc, Publications, 3d series, VI, 1905) ; W. W. Bates, The 
American Merchant Marine (1902) ; F. R. Rutter, The International 
Sugar Situation (Department of Agriculture, Bulletin, No. 30, 1905). 

248. Socialism. 

Government was devised in large measure to afford protec- 
tion and to subserve the economic interests of the community, 

655 



656 Government and Business, [§ 248 

From the very outset therefore more or less influence was ex- 
erted by the constituted authorities on the progress of wealth. 
While the state, however, has always participated in economic 
life, there have been two opposing theories, neither realized 
in practice, but both nevertheless advanced as ideals toward 
which human effort should be directed. 

On the one hand we have the advocates of laisser-faire. 
Their programme is " hands-off," and their aspiration is to 
reduce the function of government to the narrowest possible 
limits. The logical conclusion of such a theory is anarchy or 
no government. For even if we accept the " policeman the- 
ory " of the state, — the doctrine that government is instituted 
only to protect liberty and property, — it is obvious (as was 
pointed out in Chapter XI) that protection involves some re- 
straint on the liberty of others. If therefore restraint or in- 
tervention is to be completely abolished, there must be no 
restrainer, that is, no government. While we may reasonably 
object to the ordinary anarchist who illogically uses violence 
in order to bring about the absence of compulsion, the theoret- 
ical anarchists like Tolstoi and Kropotkin in Russia, Proudhon 
and R^clus in France, Warren and Tucker in America, are true 
to their premises. If we are to have no immixture of govern- 
ment in the economic life of the individual, it must be con- 
ceded that the only sure means of compassing the desired end 
is to abolish government. 

At the opposite pole are to be found those thinkers who 
discover the root of all economic evil in private property. 
Here, again, the logical conclusion is that of communism, the 
entire sinking of individual property rights in those of the 
group. This is, however, so manifestly opposed to the consti- 
tution of human nature that the idea has remained a counsel 
of perfection. Every communistic experiment has been more 
or less short-lived. Less thorough-going but almost equally 
ideal is socialism, which is willing to admit private property in 
consumption, but demands a community of production, that 
is, the assumption by organized society of all the means of pro- 



§ 24^1 Socialism. 657 

duction. According to the " scientific socialists " private prop- 
erty in the means of production is an anachronism. 

While socialistic theories are almost as old as economic 
speculation itself, it is only since the advent of the modern in- 
dustrial system that socialism has taken a deep hold on the 
mass of men. This is obviously due to the fact of the prodigious 
increase of wealth, coupled with the triumphant march of de- 
mocracy, — both of them, as we know, the results of industrial 1, 
capitalism and the factory system. The unlocking of the secrets 
of nature, the conquests of new worlds, and the vast opportu- 
nities opened to private initiative have made this the era of 
individualism. The hardy, the venturesome and the conspicu- 
ously able, together with the adroit, the fortunate and the occa- 
sionally unscrupulous, have hailed the advent of these well-nigh 
limitless chances to forge ahead, with but scant regard to the 
coincidence between their interests and those of others. The 
Anglo-Saxon " Each for himself, and the devil take the hind- 
most," like the Romanic " God helps him who helps himself," 
has been the watchword of modern economic life. 

In contrast to this idea is to be noticed the solidification of 
a wage-earning class, now definitely separated from the owner- 
ship of the tools of production. Their very progress to a more 
human standard of life has made them painfully conscious 
of the inequalities of wealth and opportunity, of crying social 
evils and miscarriages of justice, and of the seizure by indi- 
viduals of much that seems to them the national heritage. In- 
stead of being the voice of envy and confiscation, as it often 
appears to the smug, the sleek and the contented, socialism is 
to the elect few an inspiring ideal and a veritable religion ; 
while in the case of the mass it is an inarticulate cry of anguish 
and a vague expression of the demand for social progress. 

Yet with all its inspired ideals socialism is as one-sided as 
anarchism. If anarchism forgets the state, socialism forgets 
the individual. If anarchism exaggerates the possibilities of 
private action, socialism exaggerates those of public action. 
The economic theory of " scientific socialism " is, as we have 

42 



6s8 



Government and Business. [§ 249 



repeatedly seen, completely erroneous. It starts out with the 
defective labor theory of value ; it unjustifiably restricts labor 
to manual labor ; it misconceives the theory of profits ; and it 
erects into a veritable fetish the doctrine of class conflict. So- 
cialism as a movement, however, is not bound up with any such 
scientific or unscientific theories. Practical discontent, not sci- 
entific formulae, has engendered modern socialism ; to Lassalle 
and not to Marx must be ascribed the real paternity of social- 
ism as a practical movement. 

In his anxiety to escape from the evils of the present, the 
socialist is willing to entrust himself to the fortunes of a dubious 
future. Impatient of the shortcomings of distribution, he does 
not realize that his scheme will endanger production. Desir- 
ous of eliminating profits, he does not see that he will stifle 
progress. In his effort to remove actual inequalities he bids 
fair to reduce economic life to the hopeless level of a dull and 
low uniformity. With human nature as it exists at present, 
and as it bids fair to continue for an incalculable future, social- 
ism, if ever realized in practice, would be the death knell of 
economic advance and true social betterment. 

249. Development of Public Ownership. 

To affirm, however, that socialism, or the assumption by 
government of all the means of production, is theoretically in- 
defensible and practically injurious, does not imply that the 
government must refrain from assuming any of the means of 
production. If there are any criteria by which to distinguish 
between different kinds of enterprises, it is possible to advo- 
cate government ownership in some cases without incurring 
the imputation of socialism, or involving the necessary accept- 
ance of government ownership in other cases. 

It may be laid down in general that there are three con- 
ditions of government ownership. The government must do 
what the private individual cannot do, will not do and ought 
not to do. Private enterprise can, for instance, no longer 
provide an army or a navy. Again, private enterprise was not 



§ 249] Public Ownership. 659 

willing to construct the first New York subway. Finally, it is 
universally agreed that such matters as justice and police pro- 
tection ought not to be left as formerly to private individuals. 
There is, however, still a large fringe of occupations where 
there is an opportunity of discussion as to whether private in- 
dividuals ought to be permitted to carry on the enterprise. It 
is in this fringe that the modern problem of government owner- 
ship has arisen. 

Government enterprise in such occupations may be divided 
into fiscal and social monopolies. The government may decide 
to monopolize a business for purely fiscal reasons. In the case 
of certain raw materials or easily manufactured articles of wide 
consumption which readily lend themselves to the purposes of 
taxation, the government may prefer to conduct the operation 
itself and to enjoy the monopoly profits. Thus some of the Euro- 
pean governments have a monopoly of the sale or sometimes 
of both the sale and the manufacture of tobacco. In others 
we find a government monopoly of salt, and in the Eastern 
countries we find monopolies of opium, of tin and of other 
commodities. The monopoly of spirits, however, as in 
Russia, Switzerland and up to 1907 in South Carolina, is only 
partly fiscal in character. 

A consideration of fiscal monopolies belongs properly to the 
science of finance. It may be said, nevertheless, that in the 
most progressive countries fiscal monopolies are not desirable, 
because the government at best secures as revenue only the 
surplus between cost and selling price, while in the case of pri- 
vate competition there would be a tendency for cost to fall. 
In the former case, therefore, the public really loses more 
than the government receives, while in the latter case the 
government may secure the same revenue through indirect 
taxation, and the price of the product to the consumer will 
nevertheless be lower. When the political objections to a high 
indirect tax, however, seem considerable, or when the chances 
of private competition are increasingly remote, it may be wise 
to secure the desired revenue by fiscal monopoly. 



66o Government and Business. [§ 249 

Some fiscal monopolies, indeed, are no longer tolerated by 
public opinion. This is in general true of lotteries, which 
were extensively employed in former times : especially in 
America many churches and educational institutions were 
started through this agency. Government lotteries were prob- 
ably based on the quaint defence of Petty in the seventeenth 
century : " A lottery is properly a tax upon unfortunate self- 
conceited fools. The world abounds in such fools ; it is not 
fit that every man that will may cheat every man that would 
be cheated. Rather it is ordained that the Sovereign should 
have guard of these fools, even as in the case of lunatics and 
idiots." Nowadays, by a revulsion of popular feeling, not only 
public but private lotteries have disappeared in Anglo-Saxon 
countries. The continuance of the government lottery in 
southern Europe and in even so enhghtened a country as 
Prussia is as surprising as it is deplorable. 

Contrasted to the fiscal monopolies of government are the 
social monopolies, that is, enterprises which are undertaken 
by government for general social reasons. If we look at the 
existing examples of government ownership, we shall find that 
they may be included under the following heads: 

I. Transfer of values: (i) Coinage; (2) Non-Metallic 
Money; (3) Banking. 

II. Transfer of Products : (i) Markets; (2) Docks and 
Piers. 

III. Transmission of Intelligence : (i) Post-Office ; (2) Tele- 
graph ; (3) Telephone. 

IV. Transportation of Persons and Freight: (i) Roads; 
(2) Canals ; (3) Ferries ; (4) Bridges ; (5) Railroads ; (6) Ex- 
press Companies. 

V. Transmission of Utilities and Power : ( i ) Waterworks ; 
(2) Gas and Electric Light Works; (3) Electric Power 
Works; (4) Steam-Heat and Hot- Water Lines; (5) Irrigation 
and Power Canals. 

What is common to all these enterprises is that they are of 
fundamental social importance, and either lie or may lie at the 



§ 249] Social Monopolies. 66 1 

basis of general industry. This is, in fact, the criterion which 
distinguishes them from ordinary occupations, — the existence 
of a sufficiently widespread common interest and public im- 
portance to warrant their assumption by the government 
authorities. This interest and importance did not always ex- 
ist, do not everywhere exist at present, and are not found in 
the same degree in the various occupations or countries. With 
wide variations in detail, we can trace a general law of develop- 
ment, in five stages : 

( 1 ) Everywhere at first all of the above enterprises are in 
private hands, and are used for purposes of profit and some- 
times of extortion, like the highways, the coinage and the post 
offices of mediaeval Europe, or the early bridges, canals and 
markets. 

(2) In the next stage they are "affected with a public 
interest " and are turned over to trustees who are permitted to 
charge fixed tolls, but required to keep the service up to' a 
certain standard. This was the era of the canal or turnpike 
trusts and companies. 

(3) In the subsequent stage the government assumes the 
business, but manages it for profit, as is still the case in some 
countries with the postal and railway systems. 

(4) In the fourth stage the government charges tolls or fees 
to cover expenses only, as was recently true of canals and 
bridges, and as is the theory of the postal system and municipal 
water supply in America to-day. 

(5) In the final stage the government reduces charges 
until finally the service is free and the expenses are defrayed 
by a general tax on the community. This is the stage now 
reached in the common roads, in the coinage, in most of the 
canals and bridges, and which has been seriously proposed by 
officials of several American cities for other services, like the 
water supply. 

It is obvious, however, that many of the industries referred 
to have not gone through the whole of this evolution, and that 
some of them still remain in the first stage. It is also clear 



662 Government and Business. [§ 250 

that where we find other isolated examples of government 
ownership, as in the case of powder mills or shipyards or 
ordnance factories or even in the insurance business and frozen 
meat transportation of Australasia, we must ascribe them to the 
sense of the overwhelming public importance of the enterprise 
and the inadequacy or proven unfitness of private individuals 
to conduct them. What, then, are the reasons that weigh with 
some communities in inducing them to permit industries of 
paramount public importance to remain in private hands? 

250. Conditions of Public Ownership. 

The three conditions which must be carefully weighed before 
government ownership and management of any industry are 
decided upon are : ( i ) the simplicity or complexity of the 
enterprise; (2) the amount of capital invested ; and (3) the 
effectiveness or ineffectiveness of social control. 

In the case of the industries included on page 660 under 
the head of transfer of values there is comparatively little dis- 
cussion. The coinage of money is now everywhere conceded 
to be a public function. In the case of the banking business, 
however, which is far more complex, calls for a large capital 
and is easily made amenable to public control, the decision is 
clearly in favor of private ownership. The only moot question 
is as to whether the paper currency should be issued by private 
banks or by the government. The decision of this question is, 
as we have seen, largely dependent upon political conditions. 

Coming to the industries mentioned under the second head, 
it is to be noted that the markets, which in the middle ages 
were almost exclusively private, are now generally in public 
hands. In England as elsewhere in Europe the vested rights 
of individuals in the markets are being bought out by the local 
corporations. In America the large provision markets are fre- 
quently owned by the cities, and yield a substantial income. 
In the case of the docks and piers, much the same develop- 
ment has taken place. In America the progress has not been 
so rapid as abroad, but in cities like New York the municipali- 



§ 250] Government Post. 663 

zation of the water front is leading to a great increase of 
facilities as well as of public revenue. 

When, however, we come to the last three classes in the 
schedule, we reach burning problems. In a few of the sub- 
divisions, indeed, the controversy has been laid to rest. For 
instance, in the case of the common highways the process is 
about complete and the private turnpike companies have well 
nigh disappeared. In certain rural sections there is still some 
debate as to whether the roads should be toll roads or free 
highways, but in general it may be said that the discussion 
has ceased. 

The same is true in the main of bridges and canals. The 
old private canals have almost entirely vanished, and it is only 
about a quarter of a century ago that canal tolls were abolished 
on the Erie Canal. In the case of ferries a similar development 
is to be noted ; in Boston and New York City the process of 
municipalization is proceeding apace. 

The same considerations apply to the fourth class of indus- 
tries. Everybody, with the exception of extreme individualists 
like Herbert Spencer, is agreed that the post-ofifice should be 
in public hands. The amount of capital invested is insignifi- 
cant, nothing being needed but the sites and buildings and a 
few simple devices for stamping and transporting the letters ; 
the management also is comparatively simple. Yet even in 
the post-office it is a notorious fact that government manage- 
ment is more costly than private management. An American 
postmaster-general once stated that if he were at the head of 
a private company he could perform the postal business about 
one-fourth cheaper, by a more effective administration and con- 
solidation of post-offices, which is now impossible because of 
political conditions. 

Nevertheless, no one would think of abandoning the govern- 
ment postal service. The only controversy arises over what are 
in other countries ancillary features of the service. Such, for 
instance, is the parcels post. Almost everywhere, except in 
the United States, this is a well-recognized postal function; 



664 Government and Business. [§ 250 

here, however, the private express companies are so firmly 
intrenched that there seems little prospect of altering the situ- 
ation. Yet all the arguments in favor of a letter post would 
apply almost equally well to a parcels post. 

In the case of the telegraph practically the same is true. 
The investment of capital is indeed somewhat greater than in 
the case of the post, but it is still insignificant as compared 
with other interests, while the complexity of management is 
likewise slight. In every other country in the world, including 
England, Australasia and Switzerland, the telegraph, although 
frequently starting out in private hands, has been brought 
under government management. In the United States, in 
fact, the telegraph began as a government business in 1844, 
and was abandoned chiefly because the postmaster-general at 
that time erroneously thought that it would prove a dire fail- 
ure, and did not desire to commit the government to a haz- 
ardous experiment. Yet the originator of the telegraph, who 
was wise enough to appreciate the final outcome, did not con- 
ceal his opinion that it ought to form a natural adjunct to the 
government post-ofiice. 

The chief reason why there is not a louder outcry for a 
government telegraph is that the abuses of the private tele- 
graph are not important. On the other hand, it must not be 
forgotten that while postal rates are lower here than abroad, 
telegraph rates are much higher, for short as well as for long 
distances. The use of the telegraph service in the United 
States can accordingly not be compared with that in other 
countries. Every argument in favor of government post apphes 
almost equally to the telegraph. 

Virtually the same is true of the telephone. The complex- 
ity of management is indeed slightly greater than in the tele- 
graph, and it requires somewhat more care to keep up to the 
level of modern science. Nevertheless the difference is not 
material. Most countries have nationalized their telephone 
system, and even in England, where the private telephone was 
at first in complete control of the field, recent legislation has 



§ 250] Telegraphs and Railways. 665 

paved the way for its assumption by the government. Under 
government management abroad telephone rates are far lower, 
and the use by the public far greater than in the United 
States. In both the telegraph and the telephone a large part 
of what in the United States constitutes the profits of a private 
monopoly accrues elsewhere to the public in the shape of 
lower charges and wider usefulness. 

On the other hand, while the arguments hitherto advanced 
would lead to governmental assumption of the telegraph and 
the telephone, they would lead to precisely the opposite con- 
. elusion in the case of railways. There are, in fact, three sets of 
arguments against government railways, — the economic, the 
fiscal and the political argument. 

(i) The railway is the most stupendous of modern indus- 
tries. Not only is the capital account enormous, but the rail- 
way business calls for the most delicate handling, and must 
needs pay for the highest possible business ability. Railway 
presidents of single lines to-day receive salaries superior to 
that of the President of the United States ; for without con- 
summate capacity the attempt to run a railway would be a 
failure. The time may come in the distant future when de- 
mocracy will be willing to pay higher salaries, and when the 
ablest men will be ready to give up comfort and wealth for 
the more ideal end of serving the public. Under present con- 
ditions in the United States, however, to turn over the greatest, 
the most complex and the most fundamental industry of mod- 
ern times to the government would inevitably lead to such a 
decrease in efficiency as to become well-nigh intolerable. 

(2) The revenues and expenditures of our railways are about 
triple those of the government. The entire budget would then 
depend upon the temporary prosperity or ill fortune of the 
railway system. In bad times the railway revenues shrink by 
tens or even hundreds of millions. This would so embarrass 
the income side of the national budget as to necessitate a 
complete revolution not only in our tax system, but also in 
our entire budgetary methods. This point, hitherto almost 



666 Government and Business. [§ 251 

completely overlooked, would in itself suffice to defeat the 
scheme for government railways. 

(3) In comparison with railway charges within the country, 
tariff rates into the country are of slight importance. The 
political demoralization that occurs whenever a new tariff is 
framed is familiar to all. The imagination shrinks from the 
thought of what would happen in the United States if the nec- 
essarily continuous manipulation of railway rates were entrusted 
to the tender mercies of the legislature, or of an administrative 
body under its immediate influence. 

These arguments against government railways in the United 
States do not of course imply that the railways should be let 
alone. Social control of private railways, however, has as yet 
scarcely begun, and until the ineffectiveness of social control 
has been affirmatively proven it would be rash in the extreme 
to plunge into government ownership. 

251. Municipal Monopolies. 

There still remain for discussion the fifth class of busi- 
nesses mentioned on page 660. It will be observed that with 
the exception of the last item they have two points in com- 
mon : they are local enterprises and, because they depend on 
the use of the streets which cannot be continually torn up, 
they tend to become monopolies. It is for these reasons that 
they are usually called municipal monopolies, or public utili- 
ties ; and because of these facts the street railways or omnibus 
lines are ordinarily included in the same category. 

In the United States municipal ownership has been common 
in the case of waterworks, somewhat less usual in electrical 
lighting, rare in gas works, and only just beginning in street 
railways. In Great Britain, on the other hand, waterworks 
have ordinarily been in private hands, but gas works to a large 
extent under municipal control, while of late there has been 
a marked tendency toward municipal tramways and electric 
lines. In 1902, for instance, there were 118 municipal tram- 
ways with 855 miles of track, as compared to 115 private 



§ 25 1] Municipal Monopolies. 667 

tramways with 598 miles of track. In the United States, in 
1902, fifty-three per cent of all waterworks were in the hands 
of the public, and in cities of over 8,000 population the water- 
works were owned by the municipalities in 135 cases, by pri- 
vate companies in only 36 cases ; while the gas works were 
owned by the cities in only 5 cases, by private companies in 
130 cases. At the same date only 13 cities owned their elec- 
tric lighting plant. The sole examples of a municipal street 
railway in 1905 were the New York and Boston subways, 
though Chicago was endeavoring to assume the ownership and 
management of its street railways. 

In the case of the water supply the arguments are decidedly 
in favor of municipal ownership. The social interests are of 
the most commanding importance, and there is the utmost 
simplicity of management. When the watershed, the Aqueduct 
and the water-pipes are ready, nothing is needed but a few 
engineers to regulate the pressure and a few workmen to re- 
pair leaks. It is true, indeed, that with the growth of cities the 
necessary capital augments, until as in the case of New York 
tens of millions may be needed. On the other hand it must 
be remembered that water rates can easily be fixed at such a 
point that, without unduly burdening the public, they will be 
sufficient to defray interest on the debt as well as the running 
expenses. Even here, however, the experience of our large 
cities shows how important is a good system of municipal 
accounting in order that the capital and income accounts may 
be kept distinct, and in order that the public may understand 
what is the actual cost of the enterprise. 

With the gas business the matter is not so simple. Here 
the complexity of management is considerably greater. The 
stimulus of private initiative is needed to a far greater extent 
in order that the management may avail itself of the constant 
improvements in the process, thus leading to a reduction of 
cost. In the one great example of municipal gas ownership 
that has existed in America, — namely, in Philadelphia, — the 
results were satisfactory neither to the treasury nor to the con- 



668 Government and Business. [§ 251 

sumer. Whatever may be said of the dubious methods em- 
ployed by the private monopoly to which Philadelphia has 
farmed out the management of the gas service, there is little 
doubt that the consumer as well as the city has profited in a 
noteworthy degree. 

In the case of the electric light the arguments in favor of 
municipal ownership are somewhat more convincing, at all 
events in the smaller towns, where natural conditions are favor- 
able and where the outlay is relatively inconspicuous. Although 
the complexity of the enterprise is largely minimized, consider- 
able care must still be observed in the financial management. 

Finally, with street railways the arguments for municipal 
operation are less strong than in either the water or the elec- 
tric light supply. For here, although the complexity of man- 
agement is by no means so great as in the ordinary railroad, it 
is of far more importance than in the telegraph, the telephone 
or waterworks. It is unlikely that the municipal authorities 
of any American city would have had the courage to undertake 
such great revolutions in the methods of transportation as 
have been completed during the last decade in our chief cities. 
Furthermore, the financial problems involved are intricate. 
Even if municipal ownership be decided upon, however, the 
argument would seem to be in favor of following the plan of 
the New York subway, — namely, government ownership but 
private management under conditions fixed by the municipality, 
which should safeguard the social interests of the community, 
the needs of the treasury, and especially the legitimate de- 
mands of the employees. In this way the best features of each 
system might be retained. 

It is obvious, then, that in considering this problem we must 
not be led away by preconceived notions on either side. The 
outcry of socialism is a bugaboo, for in these enterprises free 
competition is inapplicable. The only choice is between a pub- 
lic monopoly and a private monopoly under social regulation. 
The problem is not simply the abstract one of the general lim- 
its of government activity, but the very concrete one as to how 



§ 252] Government Regulation. 669 

far the practical political conditions in any locality permit of 
the application of the abstract principle. We may all agree 
that in these enterprises the public element is the predomi- 
nant one. We may all concur in the belief that even where it 
seems desirable to retain for a time the management in pri- 
vate hands, the period may come when the advantages to be 
derived from private management under social control will be 
outweighed by the benefits of direct government operation. 
Yet in a democracy it is always wise to make haste slowly and 
to refrain from taking a leap in the dark. It is more than likely 
that the future has in store a complete transference of quasi- 
public enterprises to the public itself, if for no other reason 
than to check the corruption and control of local politics by 
vast business enterprises. Until general economic and politi- 
cal conditions, however, are ripe for such a radical change, the 
probable result would be the substitution of one kind of cor- 
ruption for another, and the realization of an abstract principle 
at the cost of efficiency and progress. That social control of 
quasi-public enterprises will in the near future undergo a 
marked development is beyond all question. But it is not 
until social control has been tested and found wanting that 
we shall be ready for the further step of public management 
of the gas supply and the street railways. 

252. Government Regulation. 

If government ownership, is, as we have seen, limited to a 
comparatively narrow range of occupations, government regu- 
lation of private enterprise is widespread. There are two 
currents discernible in the course of history: one has set away 
from government interference ; the other in its direction. The 
progress of liberty and the recognition of the advantages of 
competition in modern times have caused the government 
to abandon many forms of regulation which were common 
in ancient and mediaeval civilizations, but the complexity of 
modern capitalism and the abuses of freedom have neces- 
sitated the development of new kinds of government activity. 



670 Government and Business. [§ 252 

The chief forms of modern government interference with 
private industry may be put under the four heads of action in 
behalf of consumers, of producers, of investors and of the 
community in general. 

(i) In the middle ages the government interposed in behalf 
of the consumers either to guarantee good work or to insure 
reasonable price. Both of these forms of interference have 
disappeared in general industry to-day, because custom has 
been replaced by competition. The producer who gives short 
measure or turns out a defective product or charges an exor- 
bitant price cannot retain the trade in the face of competition. 
It is only where competition disappears, as in the case of the 
actual monopolies discussed in the preceding sections of this 
chapter, that social control becomes requisite. Unregulated 
private monopoly is a menace to the consumer. In modern 
times, accordingly, we find that the chief form of interference 
with competitive industry in behalf of the consumer is legisla- 
tion to safeguard health, as in the case of food inspection and 
quarantine regulation. 

(2) On the other hand, the interests of the laborer have 
been so materially affected by the advent of the factory sys- 
tem that modern interference on behalf of the producers is 
well-nigh exclusively limited to them. As we have learned 
(§ 181), there are five classes of such interference, all of 
which, except the last, are rapidly becoming universal : (a) 
legislation to safeguard health, through the so-called factory 
laws, applicable to men, women and children alike ; (d) 
legislation to ensure safety through employers' liability laws ; 
(<r) legislation fixing maximum hours of work, as in the case 
of the eight-hour law for miners and public employees ; 
(^) compulsory insurance against illness, old age or lack of 
employment ; and finally (e) legislation fixing minimum wages, 
as in Australia and New Zealand. 

While the advisability of some particular application of this 
principle in a given country is naturally open to question, 
there is no longer any doubt, as we have learned in a previous 



§ 25 2] Usury Laws. 671 

chapter, that such forms of interference are not necessarily 
incompatible with the highest ideal of liberty, in the positive 
and social sense. Experience alone can disclose the line 
beyond which such legislation may imperil business enterprise 
and thus injure the prospects of the laborer himself. To the 
social economist, however, who remembers that the objective 
is man in relation to wealth rather than wealth in relation to 
man, the prosperity of a so-called successful business which 
rests upon a degraded and miserable labor force is illusory and 
not really worth having. 

(3) In former times the striking example of interference 
by government in case of investment was in behalf of the 
borrower. The usury laws, designed to protect the unfortunate 
debtor, have, as we know (§ 171), been rendered almost com- 
pletely unnecessary through the growth of competition in the 
loan of capital. This same development has, however, brought 
about the need of intervention of the opposite kind. To-day 
it is the lender or investor in corporate enterprise, and not the 
borrower, who requires protection. Nowadays it is rare to find 
any one who is not a depositor in a savings bank, a policy holder 
in an insurance company, a stockholder in a railroad or other 
corporation, or the possessor of a bank note or a bank account. 
So wide and intricate are the ramifications of modern credit 
and finance that investors or creditors are obliged to rely more 
or less implicitly on the representations and good faith of the 
managers of these enterprises. Sad experience, however, has 
shown that the conception of real trusteeship among those 
entrusted with the funds of others is by no means so sacred 
as it ought to be ; and government has been obliged every- 
where to take precautions to define and to enforce responsi- 
bility. Here, again, there are dangers on both sides, the risk 
of over-rigidity which will hamper legitimate enterprise, and 
the danger of lax accountability which will destroy confidence. 
That, however, some solid measure of regulation is requisite 
can no longer be successfully disputed. 



672 



Governraent and Business. [§ 253 



253. Bounties and Subsidies. 



We come, finally, to the case of government interference in 
behalf of the general interests of the community. This takes 
the form of protection, which has already been discussed in a 
separate chapter, and also of bounties and subsidies. 

The danger of such intervention is that particular interests 
may foist themselves upon the legislator in the guise of general 
interests. Bounties may be classified as (a) military bounties, 
(/;) forest bounties, (c) agricultural and industrial bounties, and 
(d) land transport and shipping subsidies. The first two are not 
primarily economic in character and may be passed by. Agri- 
cultural and industrial bounties were frequent in former cen- 
turies, but disappeared in the main with the downfall of the 
mercantile system. The chief modern example is that of 
beet sugar in Europe, and it is so instructive as to merit some 
attention. 

The continental blockade under Napoleon put a stop to the 
colonial trade in cane sugar and gave an impetus to the culture 
of beets. After peace was established the beet sugar industry 
was strong enough to claim and to receive encouragement in 
France, and the movement spread somewhat later in other 
continental countries. Cane sugar was shut out, and as the 
yield of beet sugar now exceeded the domestic demand, it be- 
came necessary to secure a foreign market. This was accom- 
plished by exempting sugar for export from the internal excise 
tax imposed for revenue purposes, or by a drawback. The 
drawback was frequently greater than the excise tax, and thus 
was to all intents a hidden bounty. Other countries even 
granted direct bounties on export. 

The effect of this legislation was to confine the market of 
each country to domestic sugar, to raise prices greatly at home, 
to diminish domestic consumption, to provide a large surplus 
for export, to lower prices on the world market enormously, 
and ultimately to cause a serious financial loss to each bounty- 
granting country. While the cane sugar production of the 



§ 253] Bounties and Subsidies. 673 

world increased from 1,200,000 long tons in 1 853-1 854 to 
4,300,000 tons in 1 903-1 904, that of beet sugar rose from 
200,000 tons in 1853-1854 to 6,700,000 tons in 1901-1902. 
In the half-century the proportion of beet sugar rose from 14 
to 58 per cent of the total output of sugar. 

The system of sugar bounties gave Great Britain cheap 
sugar and made British jams and preserves world-famous ; but 
it ruined the West Indies, brought about the Cuban war, and 
was continually more burdensome to the European continent. 
After several unsuccessful attempts the Brussels convention of ^ 
1903, participated in by the chief European countries except 
Russia, abolished all bounties and excessive drawbacks as well 
as all discrimination, beyond a certain moderate point, in the 
domestic market against foreign sugar. Expenses thereupon 
decreased to such an extent that many countries also lowered 
their excise taxes. As a consequence domestic prices fell, 
export prices rose, beet sugar became more profitable and 
government expenses were reduced. 

The history of sugar bounties is an excellent illustration of 
the danger and ultimate inefficacy of agricultural or industrial 
bounties on a large scale. It is for this reason that such 
bounties are now extremely rare. In the United States the 
only recent examples are the bounty on sugar, which was 
granted during the early nineties for the four years that foreign 
sugar was imported duty free, and the insignificant bounties 
for beet sugar granted by a few of the Western states. 

Shipping subsidies, on the other hand, are still a topic of 
active discussion. The experience of the United States with 
its subsidies to the Collins and Pacific Mail lines dur- 
ing the two decades from 1845 t° 1867 was so unsatisfactory 
that the system was abandoned. More recently, however, sub- 
sidies not only in the shape of postal subsidies but also for 
tonnage, and in some cases even for construction, have been 
inaugurated by Great Britain, Germany, France, Japan and 
other countries. In the United States they have thus far been 
limited to postal subsidies. The argument for shipping sub- 

43 



674 Government and Business. [§ 253 

sidles is akin to that for protection in general, which has already 
received attention. But before such subsidies are granted on 
any considerable scale it must be shown that a large merchant 
marine is not likely to develop of itself, that the aid conferred 
by government will really stimulate the efficient rather than 
shelter the inefficient and that the subsidy will not be confined 
to a few favored enterprises. 



CHAPTER XXXVI. 
POVERTY AND PROGRESS. 

254. References. 

Charles Booth, Life and Labour of the People in London (17 vols., new 
ed., 1902); B. S. Rowntree, Poverty: A Study in To7uii Life (1901); 
J. G. Brooks, The Social Unrest (1903) ; J. A. Hobson, Problems of Pov- 
erty (1891); R. Hnntex, Poverty (1904); H. Fawcett, Pauperism: Its 
Causes and Remedies (1871); C. B. Spahr, Distribtition of Wealth in the 
United States (1896); H. V. Mills, Poverty and the State (1886); 
C. D. Wright, Practical Sociology (Am. Citizen Series, 1908), chs. xviii, 
XXV ; D. R. Dewey, [Mass.] Report on the Uiiemployed (1895) ; W. Smart, 
The Distribution of Income (1899), bk. ii, ch. viii, and Studies in Economics 
(1895), chs. viii, ix. 

Descriptions of Poverty : C. B. Spahr, America's Working People 
(1900); W. A. Wyckoff, The Workers (2 vols., 1S97-1899) ; J. A. Riis, 
How the Other Half Lives (1890), and The Battle with the Slum (1902); 
R. A. Woods, The City Wilderness (1898); Hull House Maps and Papers 
(1895); Mrs. J. van Vorst and M. van Vorst, The Woman who Toils 
(1903); A. M. 'SAxxiow^, Packi7igtown (1899); P. Roberts, The Anthracite 
Coal Comtnunities (1904) ; E. Poole, The Plague in its Stronghold (1903). 

Luxury: E. de Laveleye, Luxury (1891); H. M. Thompson, The 
Purse and the Conscience (1891). 

Cost of Living : W. O. Atwater, Principles of Nutrition and Nutri- 
tive Value of Food, Farmers'' Bulletin, No. 142, rev. ed., 1902), and The 
Chemical Composition of American Food Materials {Bulletin, No. 28, rev. 
ed., 1899); Atwater and Benedict, Experitnents in the Metabolism and 
Energy in the Human Body, 1900- 1902 {Bitlletin, No. 136, 1903 and 1904) ; 
Bureau of Labor, Annual Bulletins: Louise B. More, Wage Earners' 
Budgets (1907) ; T. Ryan, A Living Wage (1907); R. C. Chapin, Stand- 
ard of Living among Workingmen's Families in New York (1908); H. 
Higgs, Workingmen's Budgets (Jour. Stat. Soc, LVI, 1893). 

Poor Laws and Charity: J. Nicholls, History of the English Poor 
Law (2 vols., 1854, new ed. 3 vols., 1904) ; A. J. Warner, American Char- 
ities (2d ed., 1 90S); E. W, Capen, Historical Development of the Poor Law 
of Connecticut (Columbia .y/W/Vj, XXH, 1904) ; E. T. Devine, The Princi- 
ples of Relief [\(^i,) and Misery and its Causes (1909) ; J. Lee, Constructive 
and Preventive Philanthropy (1^2) ; M. E. Richmond, /r/fwoTy Visiting 

675 



676 Poverty and Progress. [§ 255 

among tJie Poor (1899) ; Committee of Fifteen, Report on the Social Evil 
(1902) ; Jane Addams, Father Huntington, R. A. Woods, F. H. Giddings, 
B. Bosanquet and H. C. Adams, Philanthropy and Social Progress , 
(1S93); National Conference of Ciiarities and Corrections, Annual Re- 
ports (187 4-). 

255. Luxury. 

In our study of the distribution of wealth attention was 
devoted primarily to the shares of the various classes in distri- 
bution. To the individual, however, the share of the total 
product that accrues to the particular class is of slight conse- 
quence when compared to his own participation in this share. 
The economic problem to him is as to the amount of wealth 
that he personally can secure. To the community as a whole, 
also, it makes a great difference whether a given sum of wealth 
is shared in an approximately equal fashion among its separate 
members or whether a minority lives in afifiuence and the mass 
in squalor. The coexistence of luxury and poverty has always 
been the stumbling-block of the social reformer. To this most 
baffling question we must now turn our attention, although' 
almost every one of the preceding chapters has indirectly 
touched upon the same subject. 

The problem of luxury in itself, and not considered as a 
concomitant of poverty, involves few difficulties. The discus- 
sion, however, has often been one-sided ; for here as elsewhere 
extremists have not been lacking. The apologists for luxury, 
for example, have from time immemorial sought to justify 
themselves by the plea that luxurious expenditure is beneficial 
because it affords employme-nt to labor. The merest tyro in 
economic reasoning, however, will at once perceive the weak- 
ness of this hoary argument. If luxurious expenditure is 
productive simply because it employs labor, the accidental 
breaking of a window-pane or the wanton destruction of a 
, growing crop is also productive in so far as it will require labor 
to repair the damage. The fallacy clearly consists in the 
assumption that the wealth spent in luxurious outlay would 
otherwise not be devoted to production. Obviously, however. 



§ 255] Luxury. 6j'] 

if the spendthrift chooses not to waste his funds, they will take 
the form of the purchase of securities, of investment in some 
enterprise or of a cash balance in the bank ; and in each case 
they will be devoted to production and thus give employment 
to labor. 

On the other hand, the opponents of luxury go to an equally 
extravagant length. •'' Plain living and high thinking " is indeed 
a most admirable moral precept, inattention to which has re- 
sulted in the ruin of many an individual. The evils of ostenta- 
tion and the passions of sensuality are as glaring as they are 
reprehensible. From a broader point of view, however, plain 
living may be carried to an extreme. Civilization, as we learned 
at the very outset of this treatise, depends on the multiplication 
of wants. If goods are to be divided into necessaries, con- 
veniences and superfluities, progress may be described as the 
process of converting superfluities into conveniences and con- 
veniences into necessities. The diversification of consumption 
lies at the root of human development. It is undoubtedly true 
that we can have no lasting progress without the accumulation 
of capital and the application of labor to raw material ; but it 
is equally evident that while a population every member of 
which is devoted entirely to wheat-raising or to the making of 
rough clothes or shelter may be very estimable, it will indis- 
putably be lacking in many of the qualities that we associate 
with higher civilization. It would, to mention nothing else, 
leave no room for the whole domain of art, which is in some 
respects the supreme achievement of the human race. Yet no 
one will make fine or beautiful things unless there is a demand 
for them, and this demand necessarily implies luxury some- 
where. Thus we seem to reach the position that luxury is evil 
and at the same time indispensable. 

The difficulty, however, is really not serious. Luxury of some 
kind is indeed inevitable, but what is one man's luxury is 
another man's necessity. The real test of the economic legiti- 
macy of luxury is the relation between the economic importance 
of the outlay and the economic importance of the result to the 



678 Poverty and Progress. [§ 255 

community as a whole. If a particular individual is markedly 
important for the community, society will not and ought not to 
begrudge him a more or less lavish expenditure in keeping 
with its estimate of his public importance. There is usually a 
close relation between consumption and production. It is true 
that in a young country like the United States men will often 
accumulate wealth for the sake of power and lead comparatively 
simple and busy lives. Almost everywhere else, however, it is 
a fact, and even in the United States it is a tendency, for 
people who acquire wealth easily to spend it lavishly. To the 
extent, therefore, that consumption is the objective point of 
production, the prohibition of luxury would be apt to work as 
an impediment to enterprise, and what would be gained at one 
end would be lost at the other. From this point of view the 
luxury of an individual who is economically important in the 
sense that he is adding materially to the productive forces of 
the community is justifiable. 

Luxury as a legitimate economic phenomenon may, however, 
be abused by those who possess the wealth or power without 
enjoying the real social importance. They spend, but give 
nothing in return. In the case of private individuals the most 
obvious example is the man who has received a large fortune 
by gift or inheritance and who has done and is doing nothing 
of value to the community. Luxury of this kind is economi- 
cally injurious. But luxury may also be associated with the 
government. Where there is an absence of constitutional 
liberty, the individual potentate may abuse the privilege, and 
we reach a situation like that in the time of Louis XIV in 
France, where the luxury of the court proved to be a heavy 
burden to the people. In a democracy, however, this danger 
does not exist, and there is even a risk of going too far in the 
opposite direction. The president of republican France in- 
deed receives a special allowance for entertainments ; but the 
lack of suitable homes and adequate salaries for American 
diplomatic representatives abroad has long been a national 
mortification. 



§ 255] Luxury. 679 

■^ . ... 

The real economic ideal is the socialization of luxury, in the 
sense either that private luxury should give way to public luxury, 
or that the luxury of the individual should be confined to those 
who are of true importance to the community and who are 
transfused by the sense of social responsibility. The economic 
test of all expenditure is the creation of a surplus of satisfactions. 
The wider the range of the participants in a given expenditure, 
the greater the surplus. Artistic and beautiful, even if expen- 
sive, things are indeed desirable ; but to accomplish the greatest 
economic as well as ethical good, their enjoyment should not 
be monopolized by the few. In classic Greece the choicest 
sculptures and paintings were displayed in the streets and 
temples ; and even in modern times the public galleries are 
assuming continually greater dimensions. Where the principle 
of the public trusteeship of private wealth has permeated the 
community we find, as in a few of the European cities, that the 
private galleries are so only in name, and that they are peri- 
odically, if not continuously, thrown open to the public. 

Thus the economic view of luxury does not really differ from 
the ethical. From the moral point of view the self-indulgent 
luxury of the mere sensualist is always to be deprecated : a 
private Maecenas is relatively defensible ; but a public Maecenas 
is still more admirable. From the economic point of view, 
the test is the importance to society of the luxurious outlay. 
The luxury of a mtxG faineant is always an economic loss ; the 
luxury of the individual who has honestly acquired his wealth, 
who has been spurred on to activity by the thought of the 
ultimate reward, and who has succeeded by serving the com- 
munity is relatively defensible ; but public luxury or the luxury 
of the same individual when he devotes his wealth to public 
purposes is a more distinct economic gain, because with the 
same outlay of effort there is now a greater enjoyment, and 
thus a greater surplus of utility. In both public and private ex- 
penditure, however, great care must be exercised not to carry 
luxury to an extreme. Ethically the danger is that the aesthetic 
element may be engulfed in sensuality; economically the 



68o Poverty and Progress, [§ 256 

danger is that the surplus or the wealth of the community 
may be whittled down by increasing consumption at the ex- 
pense of production. 

256. The Pacts of Poverty. 

Poverty, like luxury, is a matter of degree. Yet from one 
point of view we may contrast absolute with relative poverty. 
Absolute poverty may be defined as that condition where the 
income is insufficient for the bare minimum necessary to main- 
tain physical efficiency. Relative poverty, on the other hand, 
would be the inability to maintain the standard of life which 
in civilized countries includes something more than mere 
subsistence. 

Poverty depends on the relation of income to the cost of 
living. It is therefore a matter of considerable importance to 
determine on the one hand the income and on the other the 
extent and the elements of the cost of living. Unfortunately 
the material at our disposal is exceedingly inadequate, except 
as to the proportion of elements in expenditure. 

As to these the three fundamental expenses are, in their 
order of importance, the expense for food, shelter and cloth- 
ing. Several decades ago, the German statistician, Engel, 
made some calculations as to the percentages of various items 
of expenditure. More recently the United States Bureau of 
Labor has conducted elaborate investigations. Taking several 
thousands of normal families classified according to their in- 
come, the bureau found the percentage of expenditures in 1901 
to be as shown in the table on the opposite page.^ The same 
facts are illustrated graphically in the chart opposite page 

584- 

These results in the main confirm those obtained by Dr. 
Engel, although there are some discrepancies. Dr. Engel's 
propositions were as follows : 

(i) The greater the income, the smaller the percentage of 

1 United States Bureau of Labor, Eighteenth Annual Report, Cost of 
Livi7ig and Retail Prices of Food, 1904, p. loi. 



PER CENT OF TOTAL EXPENDITURE MADE FOR VARIOUS PURPOSES IN 
NORMAL FAMILIES IN THE UNITED STATES, 1901. BY SIZE OF INCOME.. 


INCOME 


20 40 60 80 








UNDER $200 




















$200 TO $300 




















$300 TO $400 




















$400 TO $500 




















$500 TO $600 




















$600 TO $700 




















$700 TO $800 




















$800 TO $900 






















$900 TO $1000. ._ 






















$1000 TO $1100 
























$1100 TO $1200 
























$1200 AND OVER 
























ALL SIZES OF INCOME 




















■■i l-UUL) 1 1 CLUIHINU 1 1 LIGHIINU 
1 1 RbNI 1 1 l-UEL 1 "t SUNDRIES 



From Bulletin of U.S. Bureau of Labor, No. 54 ( I 904;. 



^56] 



Facts of Poverty. 



68i 



outlay for subsistence. This is confirmed by the American 
investigation. 

(2) The percentage of outlay for clothing is approximately 
the same, whatever the income. This is not confirmed in 
America, where tiie highest class spends relatively twice as 
much as the lowest class. 

(3) The percentage for lodging or rent an<.l for fuel and 
lighting is approximately the same whatever the income. In 



Classified 
Income. 


Rent. 


Fuel. 


Light- 


Food. 


Clothing. 




Total. 






ing. 










Under $200 


16.93 


6.69 


1.27 


50-85 


8 68 


1558 


100 


$200-$300 


18.02 


t.09 


113 


47-33 


8.66 


18.77 


100 


$300-^400 


18.61 


5-97 


1. 14 


48.09 


10 02 


16.09 


100 


$400-^500 


1S.57 


5-54 


1. 12 


46.88 


"•39 


16.50 


100 


$50o-$6oo 


18.43 


5-09 


1. 12 


46.16 


11.98 


17.22 


100 


^6oo-$7oo 


1848 


4-65 


1. 12 


4348 


12.88 


19-39 


100 


$7oo-$8oo 


18.17 


4.14 


1. 12 


41.44 


13-50 


21.63 


100 


$800-^900 


17.07 


3-^7 


1. 10 


41-37 


'3-57 


23.02 


100 


$900-$ I 000 


17.58 


3-85 


I. II 


39-90 


1435 


23.21 


ICO 


$ICOO-$IIOO 


'7-53 


377 


1. 16 


38.79 


15.06 


23.69 


100 


$rioo-$i20o 


16.59 


3-63 


1.08 


37.68 


14.89 


26.13 


100 


$1200 or over 


17.40 


3«5 


1. 18 


36-45 


15.72 


25.40 


100 


Total 


100 


1 00 


ICO 


100 


100 


100 


100 



America this is the case as to rent, but not as to fuel, the 
relative expenditures for which decrease as income increases, 
perhaps because of better clothing, perhaps because heating 
of large buildings is more economical than in the case of 
of small houses. 

(4) As income increases in amount, the percentage of out- 
lay for sundries becomes greater. This is confirmed. 

The American investigation also sought to ascertain the vari- 
ations in expenditure according to the size of the family, and 
the result is shown in the following table of percentages for a 
large number of families with an income of from ^600 to 
$700: 



682 



Poverty and Progress. 



[§256 









c 


c 




c 


,. 


|1 


2 


IS 


4) 




u 



3 


3 


2 
u 




la 0. 



Iz; 





H 


H 







<; 


Rent. . . 


20.20 


18.88 


17.88 


17-93 


17-97 


17.04 


18.48 


Fuel . . . 


4-75 


4.69 


4.60 


4-58 


4-79 


4-49 


4-65 


Lighting 


1. 18 


I-I3 


I.16 


1.02 


1.09 


.98 


1. 12 


Clothing 


12.44 


12.81 


12.82 


12.85 


13-45 


13.90 


12.88 


Sundries 


21.30 


20.58 


19-95 


18.69 


15-50 


14.97 


19-39 


Food . . 


40.08 


41.91 


43-59 


44-93 


47.20 


48.62 


43-48 


Total. . 


100 


100 


100 


100 


100 


100 


100 



The percentages of combined expenditure for 2,567 families 
selected for detailed investigation were as follows : 



Food . 
Clothing 
Rent . 
Fuel . 



42-54 

14.04 

12.95 

4.19 



Furniture 3.42 

Insurance 2.73 

Sickness and Death . . . 2.67 

Liquor 1.62 

Amusements and Vacation 1.60 

Mortgages on Home . . . 1.58 



Tobacco 1.42 

Labor and other Organiza- 
tion Fees 1. 17 

Books and Papers ... 1.09 

Lighting 1.06 

Religious Purposes . . . .99 

Taxes 75 

Charity 31 

Other Purposes .... 5.87 

Total 100 



When, in lieu of taking percentages, we seek to ascertain 
the actual minimum of necessary expenditure for each pur- 
pose, exact figures are unfortunately lacking. The chief sci- 
entific results are confined to the item of food, and are due 
to the investigations of Professor Atwater, published by the 
United States Department of Agriculture. The quantity of 
food required is nowadays put in terms of protein (the chief 
nutritive ingredient of food) and potential energy (in the form 
of heat and muscular strength yielded by food). Potential 
energy is usually expressed in heat units or " calories," a 
calorie being the amount of heat needed to raise a gram of 
water one degree Centigrade. On this basis Atwater has cal- 



§256] Cost of Living. 683 

ciliated that, according to the muscular work accomplished, 
from 100 to 150 grams of protein, yielding 2,700-4,500 
calories, are needed daily. Men doing average moderate work 
in a temperate climate require 3,500 calories, and women eight- 
tenths of this amount. Detailed studies have also been made 
as to the nutritive and economic qualities of various kinds of 
food and the relation of nutrition to waste, careful attention 
to which would enable far better results to be attained by the 
same outlay as at present. The American workman especially 
would gain much by utilizing these interesting results. 

The principal application of such considerations to the statis- 
tics of poverty has been made by Rowntree in his remarkable 
study of conditions in the English town of York. According 
to his calculations, the minimum necessary expenditure for a 
husband and wife with three children is 21s. 8d., or about 
$5.25 a week. On this basis, and making allowance for fam- 
ilies of different sizes, he arrived at the startling conclusion 
that almost twenty-eight per cent of the total population were 
living in poverty, — that is, in receipt of an income insufficient 
for the maintenance of mere physical efficiency. This was a 
striking and unexpected confirmation of the conclusions by 
Booth in his magnificent study of economic and social condi- 
tions in London, that thirty per cent of the London population 
lived in poverty, below the necessary minimum. 

The unfortunate individuals within the poverty line are 
wretchedly housed, inadequately clothed and underfed. The 
results show themselves directly in the far higher average death 
rate, the greatly increased infant mortality, and the marked 
inferiority in height, weight and general physical condition. 
Of the indirect influences on industrial efficiency, on national 
character and on moral development it is not necessary to 
speak. 

The conditions in London and York may be taken as fairly 
typical of those in modern British industrial towns. Similar 
comprehensive data for the United States are lacking, and only 
the beginnings of scientific investigation have been made. 



684 Poverty and Progress. [§257 

AH that we have are the more or less fragmentary statistics of 
Chapin and More for the City of New York, so that an almost 
virgin field discloses itself to the attention of the statistician 
and scientific investigator. No one, however, who is conver- 
sant with social conditions in our large cities can doubt that if 
in prosperous England over a quarter of the urban population 
is below the poverty line, and another large part scarcely above 
it, the situation is not fundamentally different in the industrial 
portions of America. It is true that only one-third of the 
population live in cities as against two-thirds in England, and 
it is indisputable that the American standard of life is higher. 
But whether it is thirty per cent or only -fifteen per cent of the 
American urban population that is submerged below the pov- 
erty line, the fact that in our much vaunted modern civilization 
there should be millions of human beings who do not possess 
an income adequate for bare physical efficiency is sufficiently 

appalling. 

257. The Causes of Poverty. 

The causes of poverty are sometimes classified as individual 
and social, or the result of misconduct and of misfortune. In 
the first category are put such phenomena as intemperance, 
habitual indolence, sensuality, gambling, ignorance, shiftless- 
ness and improvidence. This classification, however, is erro- 
neous for a double reason. 

In the first place, very little permanent poverty can be 
ascribed to any or all of these so-called individual causes 
alone. They are almost without exception found in conjunc- 
tion with some of the so-called social causes, and it is virtually 
impossible to segregate them and to estimate their relative im- 
portance separately or as a group. Secondly, the distinction 
between individual and social causes has been much weakened 
by natural science as well as by economics and sociology. 
Many of the so-called personal traits, for instance, have been 
shown to be the result of heredity, as in the famous families 
of the Jukes and the Ishmaels, every member of which to the 
number of several hundreds was infected by the family taint. 



§257] Causes of Poverty. 685 

Still more important, however, is the fact that the personal 
and non-hereditary characteristics of the individual are in 
large measure the result of his environment. It is a familiar 
fact that individual ethics are modified by social ethics ; it is 
not always appreciated that intemperance, vice, ignorance and 
improvidence are to a very great extent the consequence of 
economic and social surroundings. If it be said that intem- 
perance produces poverty, it may equally well be said that 
poverty breeds intemperance. What could be more startling 
than the well-authenticated fact that in many cities a large 
percentage of the unfortunate women whom we associate with 
the term social evil are reduced to ply their vocation by pov- 
erty alone? It is indeed true that no matter how ideal the 
general economic conditions may be, there will always be 
some individuals who will sink to the bottom ; and it is this 
to which the Bible no doubt refers when it tells us, " The poor 
always ye have with you." But to suppose, as some of the 
prosperous and cynical well-to-do are wont to assume, that 
this kind of poverty forms any conspicuous part of the whole 
is preposterous in the extreme. 

A better classification is that into immediate and ultimate 
causes of poverty. In Rowntree's careful investigation it was 
found that where the family earnings (all of them expended 
on the bare necessaries of life, and not including other useful 
or wasteful expense) were insufficient for mere physical effi- 
ciency, the immediate causes were as follows : death of chief 
wage-earner, 15.63 per cent; illness or old age of chief wage- 
earner, 5.1 1 percent; irregularity of work, 5.14 percent; size 
of family, 22.16 per cent ; regular but insufficient wages, 51.96 
per cent. So far as the size of the family is concerned, the 
poverty line was constructed on the basis of a family of three 
children. Had a larger family been selected as the average, 
the numbers living in poverty would naturally have been cor- 
respondingly increased. But while a larger family would in- 
volve a condition of greater poverty, it is interesting to note 
that this means not continuous poverty, but alternating periods 



686 



Poverty and Progress. 



[§257 



of dire want and comparative comfort. The life of the ordi- 
nary unskilled workman may be divided into several periods. 
During childhood he will be apt to live in poverty until he as 
well as his brothers and sisters begin to contribute to the fam- 
ily income. He will then be in a position to save and may 
continue to do so after marriage. When, however, more than 
two or three children arrive, he will again fall below the pov- 
erty line and remain there until most of the children are old 
enough to earn something. Then commences the second 
period of less acute privation which continues until the chil- 
dren marry and leave him in old age, when he for the third 
time falls below the poverty line. This situation can be illus- 
trated in the following diagram : 



CHILDREN MARRY 
> ^AND LEAVE HOME; 



^MARRIES 



CHILDREN 
yBEGIN TO EARN; 




LABORER 
kPA ST WORK; 



AGE 



From.,Rown.treei "Poverty, A Study in Town Life." 



The startling fact, however, is that, even with an average 
family and regular work, over one-half of those living in 
poverty at any moment are reduced to that state simply be- 
cause, notwithstanding the exercise of thrift, sobriety and 
care, the income is inadequate for support. 

When we ask what is the ultimate cause of poverty, it is at 
once obvious that no single reason can be separated from the 
others. Modern poverty is bound up with the facts of modern 
economic life, and modern economic life is a complex product. 
To select any characteristic feature of the present industrial 
system and to single it out as responsible for poverty is naive. 



§ 258] Relief of Poverty. 687 

but worthless. The Malthusian seizes upon redundant popu- 
lation, the communist upon private property, the socialist upon 
property in means of production, the single taxer upon prop- 
erty in land, the co-operator upon competition, the anarchist 
upon government, the anti-optionist upon speculation, the 
currency reformer upon metallic money, and so on. They all 
forget that widespread poverty has existed in the absence of 
each one of th£se alleged causes. Density of population, 
private property, competition, government, speculation, and 
money have each been absent at various stages of history 
without exempting society from the curse of poverty. Each 
stage has had a poverty of its own. 

Nothing is more natural, but nothing is more fraught with 
danger, than to cast a halo over the past and to make of it a 
golden age. The poverty of to-day is sad and even heart- 
rending, but to the student of economic history it is clear that in 
the older industrial countries at least, where alone a fair com- 
parison can be made, the poverty of to-day is less than it was 
a century ago, and far different from what it was in former 
ages. Even the socialists are now abandoning their contention 
as to the gradual pauperization of the mass of society, and are 
restricting themselves to the complaint that the workman is not 
securing a fair share of the undoubted increase of wealth. More- 
over, at the present time there is bitter poverty in India, a 
country without the modern industrial system ; and still more 
acute destitution among savages who are ignorant of property in 
land. The causes of poverty are as complex as the causes of 
civilization and the growth of wealth itself. 

258. Relief of Poverty. 

All remedies for poverty fall into one of two classes, — the 
palliative and the curative, — the endeavor to relieve poverty 
and the attempt to prevent poverty. The distinguishing feature 
of modern life is the growth of a public sentiment which seeks 
to cope with the evils of poverty from both points of view. 

The relief of poverty has taken the forms of private and 



688 Poverty and Progress. [§ 258 

public relief. • Private charity, again, has been either individual 
or institutional. We thus have the three classes of individual 
relief, private institutional relief and public relief. 

( 1 ) Individual charity, while incontrovertibly of great weight 
in special cases, is often likely to be of ethical importance to 
the bestower rathbr than of economic benefit to the recipient. 
Experience has shown that indiscriminate personal charity is 
frequently ill-advised, because it is the result only of the heart 
rather than of heart and head combined. The consequence is 
that it is just as likely to perpetuate as to relieve beggary and 
pauperism. The realization of this fact has led to the replace- 
ment, or at all events to the supplementing, of personal by 
institutional relief. 

(2) Institutional private relief is exemplified by the char- 
itable agencies like benevolent societies, relief and aid societies, 
associations for improving the condition of the poor, fatherless 
and widows' societies, and societies for promoting frugality and 
repressing mendicancy. Above all, however, we must signalize 
the charity organization societies which have been rapidly de- 
veloping during the last half-century. These are endeavoring 
to substitute scientific principle for hap-hazard action, and 
have done not a little to direct the stream of generosity into 
the right channels. Pauperism, however, either brings in its 
train or aggravates many other distressing evils such as the 
various forms of disease, unsanitary homes, dependent chil- 
dren, and liability to economic and legal exploitation. Num- 
berless, therefore, are the modern institutions like private 
hospitals, dispensaries, sanatoria, anti-tuberculosis leagues, 
improved dwellings and model lodging-house companies, 
orphan asylums, creches, kindergartens, juvenile homes, fresh 
air funds, retreats for the aged, the convalescent and the 
incurable, provident loan societies, employment agencies, 
wood-yards and laundries, industrial colonies, legal aid socie- 
ties, peoples' palaces and the like. Bewildering in their com- 
plexity, the proper management of these philanthropic agencies 
has become a distinct profession and the subject of a separate 
discipline, with a stupendous literature of its own. 



§ 258] Poor Laws. 689 

In former times institutional philanthropy was to a large 
extent religious in character. All the great religions of the 
world have inculcated the virtue of benevolence, and not the 
least contribution of Christianity consisted in the new spirit of 
universal brotherhood and charity which it infused into the 
pagan European world. During the major portion of the 
middle ages, in fact, the charities of the church were virtually 
the sole embodiments of organized philanthropic activity. It 
was only after the Reformation, when the property of the church 
and of many of the religious orders was " secularized," that the 
need of some form of public relief was recognized. 

(3) The most important illustration of public relief is that 
known as the Poor Law System. In England, after the con- 
fiscation of the guilds and chantries during the sixteenth cen- 
tury, the bishops were admonished to exhort their parishioners 
to more liberal gifts for the poor. As these exhortations grad- 
ually lost their efficacy, it was finally provided that in case of 
contumacy the justices of the peace might order an assessment. 
Thus did the voluntary contributions gradually change into 
compulsory payments, — a process which may be observed in 
the history of all taxation. In 1601 a general assessment was 
levied for the support of the able-bodied and impotent poor. 
In 1662 the settlement act was passed, designed on the one 
hand to increase the facility of relief, but on the other to limit 
it strictly to native inhabitants of the locality. The act of 1722 
authorized the building of workhouses, and the withholding of 
relief from those that refused to enter. Gilbert's act of 1782 
directed the local authorities to find for the unemployed poor 
work suitable to their requirements and in the proximity of 
their homes. The system reached its climax in the act of 
1796, when Parliament followed a similar resolution of some 
justices of the peace who had assembled at Speenhamland in 
the preceding year and authorized outdoor relief for the 
necessitous as a substitute for the now discredited workhouse 
test. 

It was at one time the custom to ascribe a disproportionate 

44 



690 Poverty and Progress. [§ 259 

influence to the poor law. The English system was undeniably 
a direct premium on improvident marriage and lack of frugal- 
ity. But the oft repeated assertion that it impoverished the 
comfortable and perpetuated the miserable is clearly an ex- 
aggeration. The situation at the close of the eighteenth and 
beginning of the nineteenth centuries was indeed deplorable ; 
but, as we know, it was very largely the result of the abuses 
connected with the transition from the domestic to the factory 
system. The poor law played its part, but after all a relatively 
inconspicuous part, in maintaining the degradation of the 
working classes. In the same way the great reform of the poor 
law in 1834, by which outdoor relief was abolished, was only 
one of the many ameliorative movements which revolutionized 
the condition of the laborers in the second quarter of the 
century, such as the abolition of the conspiracy acts, the 
passage of the factory laws, the repeal of the corn laws, 
the reform of taxation, and the growth of democracy. The 
old poor law did not create English poverty, and the new 
poor law did not abolish it. 

In the United States, where pauperism has been for obvious 
reasons less acute, the two salient features of the poor-law sys- 
tems have been the almshouse and outdoor relief. Public out- 
door relief, however, has been substantially abolished in some 
of the larger Eastern cities, like New York, Philadelphia, Balti- 
more and Washington, with distinctly good results. A consid- 
eration of the relative merits of public and private rehef, 
which is becoming the subject of warm discussion in many 
parts of the United States, would however lead us too far 
astray; for the controlling considerations are not primarily 
economic in character. 



259. Prevention of Poverty. 

We have seen that there is no single cause of poverty ; there 
can accordingly be no single preventive of poverty. The naive 
and simple remedies that are commonly advanced may be re- 



§ 259] Prevention of Poverty. 691 

duced ill their practical operation to two, — a diminution of 
population and a diminution of wealth. 

After the discussion in Chapter IV. the suggestion that pov- 
erty can be abolished by checking population scarcely needs 
any further comment. Human beings are producers as well 
as consumers, and under proper conditions an increase of 
population may be entirely compatible with an increase of 
general wealth. Nothing is more indisputable than that num- 
bers have increased and relative poverty has decreased in 
many modern countries. 

The diminution of wealth, on the other hand, is in itself 
never advanced as a remedy, for that would be too obviously 
absurd. But all the other naive remedies for poverty are prac- 
tically tantamount to this. To the attentive reader of the pre- 
ceding chapters it should be abundantly clear that private 
property and individual initiative have been the motor forces 
of the accumulation of wealth and the real progress of humanity. 
Anything therefore which seriously saps these foundations neces- 
sarily undermines not only the whole structure of industrial 
society but the edifice of civilization itself. Anarchism would 
abolish government, but in so doing would rob society of the 
fundamental protection which enables it to exist in peace. 
Communism would level distinctions of wealth, but in eliminat- 
ing private property would destroy progress. The restriction of 
large fortunes by taxation, by direct prohibition or by limitation 
of bequest would seriously impair the spirit of enterprise. So- 
cialism, which would abolish private control of production, 
would in the present condition of the human race necessarily 
diminish production. Socialism is virtually co-operation ; and 
the true co-operative spirit is wofully lacking in the mass of 
mankind. There are indeed conspicuous examples of wealthy 
socialists, but they have been for the most part men of lofty 
idealism who would have played an equally prominent part in 
the reform rather than the reconstruction of modern industry. 
If the rank and file of men were ethically as advanced as are 
many of the socialist leaders, there would be no need of reform. 



692 Poverty and Progress. [§ 259 

Socialism assumes that mankind is ready for the self-abnegation 
implied in the very idea of the public and co-operative activity 
which is to include the whole of productive enterprise. History 
and psychology alike teach us that this grossly underrates the 
importance of the economic motive. When the world is ready 
for socialism, socialism will be unnecessary. In the mean time 
any serious encroachment of socialism would inevitably bring 
with it a slackening in the pace of accumulation ; and in the 
long run a diminution of wealth cannot mean a diminution of 
poverty. 

To say, however, that poverty has always existed is no reason 
for believing that it should continue forever to exist. Absolute 
equality of conditions is indeed an iridescent dream, for it runs 
counter to the inequality or differentiation which is the law of 
all life and the explanation of all change. But if the preceding 
discussions in this volume have emphasized any one point it 
is the fact of the progressive intermingling of the individual and 
social points of view, — the interpenetration, as it were, of the 
individual by the claims of society, and on the other hand the 
infusion into the collective activity of some of the surplus energy 
which must always continue to find its tap-root in the efforts 
of the individual. Translated into economic terms, this means 
that the modern industrial system is slowly producing not only 
political democracy but economic democracy, and that eco- 
nomic democracy is incompatible with permanent and wide- 
spread poverty. 

This does not imply that economic forces alone and directly 
are creating a millennium, or that the political ideal is laisser- 
faire. Government and the pubHc sentiment behind it are 
in a sense the outgrowth of the economic situation ; but, as 
we have learned, they are also potent factors in modifying the 
situation. Economic, political and ethical forces are conspiring 
to bring about progress by raising the social level. In ordinary 
business life this means the gradual but clearly discernible 
elevation of the standard of commercial morality. So far as 
■poverty is concerned it means the lifting of the standard of life 



§ 26o] Future of Economic Life. 693 

of the laborer and the setting, in ideal at least, of an irreducible 
minimum, below which national production is not worth having. 
Practically this process assumes the varied forms of trade-union 
activity, of education of the unskilled, of factory legislation, of 
labor insurance, of employers' liability, of improved housing, 
of trade agreements, of control of monopoly and above all, of 
the curtailment of special privileges. The process is a slow one, ^ 
because it is an arduous task to make the successful and self- 
satisfied business man realize that the true ultimate interests 
of his class are associated with the increased consumption that 
can come only from the higher standard of life of the mass of 
the producers. It is in the last instance public opinion alone 
which in a democracy can protect the well-intentioned and 
long-sighted employer from the unfair competition of his un- 
scrupulous and selfish rivals. 

The way, therefore, to have progress without poverty is not 
to level down but to level up ; to do nothing which will pre- 
vent the capable, the resourceful and the daring from exerting 
their skill and inventive ingenuity ; but, on the other hand, to 
keep open the door of opportunity for all and to throw about 
the mass of the less fortunate and the less gifted the pro- 
tecting mantle of a public sentiment which will be intolerant 
of injustice, and which will insist upon the creation of condi- 
tions that insure to every worthy human being at least the 
possibility of a worthy human existence. 

260. The Future of Economic Life. 

We come finally to the questions which at the close of such 
a study as this inevitably force themselves upon us : Whither 
are we tending? What lessons have an economic interpretation 
of the past and of the present to teach us in our guidance for 
the future? What are the forces that are making for progress 
or retrogression ? 

There is no blinking the fact that many give a pessimistic 
answer to these queries : they call attention to the increase of 
luxury and materialism ; they look with suspicion upon what 



694 Poverty and Progress. [§ 260 

they term the growing plutocracy and the new feudalism ; 
they point to the warning example of the oriental monarchies, 
of classic Greece and Rome, and tell us that in our case, too, 
the period of prosperity which is now upon us will be followed 
by one of decay and final dissolution. What has been will be : 
there is nothing new in human affairs. 

Yet a discriminating study of the considerations set forth in 
this volume should preserve us from so gloomy and despond- 
ent an attitude. The three factors of importance to which all 
that has preceded may be reduced are : the growth of indus- 
trial capital, the internationalism of science, and the emer- 
gence of the democratic ideal. 

(i) In ancient Rome, as in feudal Europe and colonial 
America, the conditions of landholding played a dominant 
role. The control of the trade routes was the chief factor in 
tlie rise and fall of the oriental monarchies, of the Greek city 
states, of the Italian and German towns, of Portugal and 
Spain. The distinguishing mark of modern times, on the 
other hand, is the existence of industrial capital. We speak 
glibly of the recent progress of science, but few realize the 
true import of this growing subjection of nature to man, and 
of the revolutionary character of this harnessing of the powers 
of the universe to the yoke of the human intellect. For one 
thing, it has made possible an almost limitless increase in 
production. Landed capital, under the unscientific methods 
of the past, was able to go so far and no farther. The advent 
of commercial capital indeed increased prosperity, and to the 
extent that exchange is really a phase of production, aug- 
mented the productive power of the world. But here, again, 
its efficacy was confined within narrow bounds. Creating new 
values simply by the bartering of existing values, the pyramid 
of wealth rested on the basis of the actual production within 
each community, and could not be piled up beyond a certain 
height. But, with modern industrial capital and the snatching 
from nature of her intimate secrets, the utihzation of natural 
resources within each country has become almost boundless. 



§ 26o] The Economic Ideal. 695 

and provides an ever-broadening base for the benefits of trade 
and commerce. 

It is for this reason alone that the history of the world in 
the future is to be so different from the past. In former times, 
after a certain point had been reached in agriculture and com- 
merce, human ingenuity was powerless to do more than divide 
existing wealth ; and with this fixed limit to production, it is 
no wonder that each civilization in turn should have attempted 
to secure the prize for itself. Hence the rise, the glory and 
the decline of nations. In future, however, in lieu of dividing 
existing wealth, each nation which lives up to its opportunities 
will be able to create new wealth. Important as will continue 
to be the land question and the trade relations, the secret of 
ultimate success is to be sought in the fundamental conditions 
of industrial enterprise at home ; and with the growth and 
control of industrial capital there need be no limit to the con- 
tinuous march of wealth and progress. 

( 2 ) Science is not only boundless in its possibilities, but im- 
partial in its activities. Science transcends all national lines. 
Never again will a country be able to achieve or to retain a 
monopoly of industrial advantages. For the time being, in- 
deed, climatic conditions or racial characteristics may give 
one nation a temporary preponderance in some particular cat- 
egory of production ; but with the overwhelming importance 
of new industrial methods, applicable impartially to all natural 
forces, the advantage cannot be permanently retained. 

We are accustomed to speak of the changes brought about 
by the alteration in the media of transportation and the growth 
of the world market ; we do not yet realize the full implica- 
tions of the industrial revolution. Rightly conceived, it means 
the coming internationalism of mighty empires in friendly com- 
petition with each other, not for the division of what exists, 
but for the utilization of what can be made to exist. For the 
immediate future, indeed, while nations are still in unequally 
developed stages of industrial growth, and while there remain 
extended markets not yet on the highroad to industrial pre- 



^9" Poverty and Progress. [§ 260 

dominance, there will still be some room for the nationalism 
of the old type with its protective features and its commercial 
rivalries. In these contests we must undoubtedly take our 
part. But with every decade's progress in science the con- 
ditions will change, and the old nationalism of exclusiveness 
will melt into the new cosmopolitanism based upon the con- 
tinual progress of each great and economically homogeneous 
community. 

(3) The final point of difference — the flower and fruit of 
all its forerunners — is the existence of the democratic ideal. 
We point, indeed, with complacency to the advance made by 
the skilled members of the working class, but to those who 
reahze the essential conditions of successful democracy, where 
the mass of citizens are necessarily the laborers, the ideal to be 
attained advances still more rapidly than the actual progress. 
The brutish, lethargic peasant of the old world is, perhaps, 
content with his crust and his misery. The free citizen of the 
modern industrial state wants, and wants justly, to participate 
in the spiritual as well as the material benefits of modern civil- 
ization. With every advance in his economic position, due to 
the interplay of modern industrial forces, new vistas of possi- 
bilities disclose themselves, new sources of legitimate satisfac- 
tion make their appearance. The social unrest of to-day, 
with all its disquieting and regrettable incidents, is on the 
whole a salutary symptom. It is but the labor pains in the 
birth of the new industrial order which has been in the mak- 
ing for the past few generations, and of which the faint outlines 
are even now discernible. 

This new industrial order depends, however, on the emer- 
gence of a healthy public opinion. In antiquity political and 
social opinion was a class opinion. In the middle ages the 
incoherent public opinion was intolerant to competition. In 
modern times the progress of economic thought and the pres- 
sure of economic fact in uplifting the hitherto submerged classes 
of the community are generating a pubHc opinion which frankly 
recognizes the benefits of a healthy competition, but which 



§ 26i] Role of Economics. 697 

insists more and more on an effective social control of compe- 
tition to the end that it be elevated and purified. 

A study of the economic forces now at work therefore 
justifies a reasonable hopefulness. The productive powers of 
society are augmenting at such a prodigious rate that we need 
no longer apprehend a decay of general prosperity or of national 
power. There is to be no further irruption of the barbarian, be- 
cause there will soon be no more barbarians. There is to be 
no swinging back of the pendulum of civilization, because under 
the influence of the new economic forces only those nations 
can succeed that understand how to utilize industrial capital ; 
and this comprehension implies an ever-ascending stage of 
civilization. There is to be no domination of each people in 
turn over all the others, because of the internationalism of 
science and the impartial territorial diffusion of industrial 
agencies. And within each nation, while the rich are un- 
doubtedly getting richer and while poverty still stalks abroad, 
the poor are not getting poorer. The creation of a more 
equable, because a more complete, competition through the 
development of the system of collective bargaining and the 
curtailment of all special privileges ; the recognition on the 
part of the public that lasting prosperity depends not only on 
the conservation and free play of capital, but also on the 
gradual elevation of the laborer from a cheap man to a dear 
man; the coming social control of competition itself in the 
interests of a more enlightened and hence really freer rivalry, 
— all these will inevitably tend to secure to each class in the 
community its proper share in the national dividend. 

261. The R61e of Economics. 

Economics, then, has a progressively important role to play 
in the future. We thus come at the end to the position from 
which we started out. With the commanding significance of 
the economic life in its influence on social progress, econom- 
ics, in pointing out exactly what is, must necessarily concern 
itself with what ought to be. If the economic student is the 



698 Poverty and Progress. [§261 

real philosopher of social life, he will take a more notable part 
in future speculation and future legislation. The various social 
classes, by reason of their very being, see only the particular, 
not the general interests. The farmer understands the work- 
ings of Wall Street, and the factory hand comprehends the 
condition of the world market, as little as the capitalist real- 
izes the true ideals of the laborer. To let any one class act as 
spokesman for the other is pregnant with danger. The eco- 
nomic student, if he is worthy of his calling, will proceed with- 
out fear or favor ; he will be tabooed as a socialist by some, 
as a minion of capital by others, as a dreamer by more. But 
if he preserves his clearness of vision, his openness of mind, 
his devotion to truth and his sanity of judgment, the deference 
paid to his views, which is even now beginning to be apparent, 
will become more and more pronounced. The influence of 
economic conditions on economic theory has been, let us 
hope, abundantly demonstrated ; but the reciprocal influence 
of economic thought on actual conditions is in danger of being 
overlooked. As the science itself becomes more and more 
complete, it will be in a better position to apprehend and to 
explain the real content of existing conditions and the true 
method of making the actual conform to the ideal. Economics, 
which is to-day only in its infancy, and which is of all disci- 
plines perhaps the most difficult and the most complicated, is 
indeed interlaced with and founded upon the actual condi- 
tions of the time ; but like natural science the economics of 
the future will enable us to comprehend the living forces at 
work, and by so doing will put us in a position to control them 
and to mould them to -ever higher uses. Economics is there- 
fore both the creature and the creator. It is the creature of 
the past ; it is the creator of the future. Correctly conceived, 
adequately outlined, fearlessly developed, it is the prop of ethi- 
cal upbuilding, it is the basis of social progress. 



INDEX. 



INDEX. 



A BSTINENCE, 320. 

Agricultural improvements, influ- 
ence on rent, 382, 383. 

Agriculture, extensive and intensive? 
311 ; in the United States, 311, 312; 
large scale, 334-337; machinery in 
335, 336; migratory, 309; possibil- 
ities of, 43, 44; stages in, 309-312; 
surface tillage, 310; three field sys- 
tem, 311 : two field system, 310. 

Aldrich law, 580. 

American system, loi. 

Anarchism, 656, 657 ; as a remedy for 
poverty, 691. 

Annuities, 646, 647 ; tontine, 647. 

Anti-trust laws, 349. 

Apprenticeship, trade union restriction 
of, 167, 437-43S- 

Arbitrage, 359, 524. 

Arbitration, 445-447. 



■pALANCE of bargain, 116. 

Balance of trade, 116, 117, 589, 590, 
592-594, 601. 

Banking, advances, 528 ; asset, 565, 583 ; 
clearing-house, 542; development of, 
524-530; operations, 530-536; power, 
541 ; statements, 536-539. 

Banking, Credit and, ch. xxx, 67S-553. 

Banking principle, 562. 

Bank notes, 554-571; character, 533, 
534; denomination, 560,561; elas- 
ticity of, 576, 577, 581, 582; emer- 
gency issue, 566; monopoly of, 555, 
556; regulation of, 561-565. 

Bank rate, 549, 550, 572-576. 

Bank reserves, 543-549; amount of, 
547, 54S; character of, 543, 544; com- 
position of, 545-547 ; protection of, 
548-550. 

Banks, chartered, 559; co-operative, 
444; early American, 566-569; free, 
559; giro, 526, 527; national, 567- 



572, 580-583; of deposit, 526, 527; 
of discount, 528, 529, 539-543; of 
issue, 529, 554-561 ; safety fund, 
567, 568; savings, 527; Suffolk, 566. 

Bequest, 136, 137. 

Billeter, G., 404. 

Bills of exchange, 593-596. 

Bimetallism, abandonment of, 502-507; 
embarrassments of, 496, 497 ; in 
nineteenth century, 496-502 ; mean- 
ing of, 496 ; mediaeval, 493-496. 

Birth rate, 57. 

Blacklist, 440. 

Bland-AlLson act, 499, 500. 

Bodin, 116. 

Bonds, kinds of, 326, 327. 

Bounties, 672-674. 

Boycott, 440, 441. 

Brassage, 482. 

Biicher, C, 89. 

Building and loan associations, 444. 

By-products, 252. 

r^AIRNES, J. E., 158, 475. 

Call loans, interest on, 531, 576- 
580. 

Capital, ch. xxi, 313-328. 

Capital, 16, 209, 280 ; accumulation 
limited by marginal forbearance, 407, 
40S ; active and passive, 314, 315; 
agricultural, 315; as basis of round- 
about production, 316-318 ; as capi- 
talized income, 17, 402; as equivalent 
to the available stock of wealth, 321 ; 
as foundation of culture, 319, 320; 
as a homogeneous fund, 393-395 ; as 
originating in saving, 319, 320; as 
synchronizing labor and its reward, 
31S; commercial, 315 ; financial, 315, 
316; fixed and circulating, 314, 315; 
function of, 18, 316-318; fund of, 
215-219; industrial, 315, 316; in 
Greece and Rome, 110-112; invest- 



702 



Index. 



ment of, 324-32S; kinds of, 313-316; 

origin of term, t; ; productivity of, 

316-318; relation to income, 15-19; 

traditional definition, 17. 
Capital value, 209-211. 
Capitalization, 266, 267; relation to 

crises, 585. 
Capitalization of Value, The, ch. xiv, 

204-221. 
Carey, H. C, 277. 
Cartel, 339. 
Cash credits, 533. 
Cash reserves, 343-550. 
Cash transactions, 460. 
Cassel, G., 407. 
Character and Factors of Production, 

ch. xviii, 275-284. 
Charity, 688, 689. 
Check system, 539-543. 
Child labor, 284; prohibition of, 430, 

43'- 

Civic Federation, National, 446. 

Civil war, economic causes of, 102. 

Clan, 85. 

ClarJc, J. B., 124, 185. 

Clark's law, 185-18S. 

Class competition, 143, 144, 

Class conflict, 144. 

Classification, railway, 628-631 ; as 
Influenced by value of service princi- 
ple, 628, 629. 

Clearing-house, 542, 543; coin certifi- 
cates, 542 ; loan certificates, 544, 545. 

Climate, influence on character, 38, 39. 

Coin, minor or token, 453-456; stock 
of, 451; underweight, 483. 

Coinage problems, 481-485. 

Colonies, 59; forced labor in, 161. 

Combination, advantages of, 341 ; 
causes of, 341 ; effects of, 344-347 ; 
extent, 342; growth of, 340-344; 
influence of railway charges on, 341, 
342; influence of tariff on, 341, 342; 
limits of, 347-350. 

Commercial paper, 521-523 ; character 
of, 577, 578. 

Commodity, g, 10. 

Communism, 64, 136; as a remedy for 
poverty, 691; attitude toward rent, 
388. _ 

Competition, ch. x, 139-153. 



Competition, 229 ; as annihilating prof- 
its, 356, 357; as cause of railway dis- 
crimination, 623; cut-throat, 146, 
147; fair, 147, 14S ; in railway busi- 
ness, 347, 348, 622-624 ; limits of, 
147-150; of classes, 143, 144; of 
factors production, 401,402 ; of races, 
144, 145; potential, as limiting 
monopoly price, 36S; rise of, 116; 
relation to progress, 141, 143. 

Concentration of industry, 329-350; 
distinguished from monopoly, 330. 

Conciliation, 445-447. 

Consolidation, 331, 337-340; extent of, 
342. 

Constant returns, 251. 

Consumption, minimum for efficiency, 
682, 683, 685, 686 ; relation to pro- 
duction, 276, 277, 283, 2S7, 

Convertible husbandry, 311. . 

Co-operation, 140, 151, 152, 444, 445. 

Copyrights, 152, 153. 

Corner, 360, 361. 

Corporation, 96-98,325-327; holding, 

339, 340. 

Cosmopolitanism, 118, 610, 611. 

Cost, as equivalent to pain, 191 ; as a 
measure of value, 199; constant, 249- 
251; differential, 245-247; increasing 
and diminishing, 250, 251 ; joint, 251- 
253, 626 ; law of maximum or margi- 
nal, 246, 247 ; law of minimum, 247- 
249; marginal, as determining nor- 
mal price, 246, 247 ; marginal, equiv- 
alence with marginal utility, 192; 
marginal, relation to price, 378; 
meaning of, 189-192; minimum, as 
determining normal value, 247-249; 
of money, 469 ; relation to value, 190, 
419; social, 243, 244; social and indi- 
vidual, 192, 193; social equivalence 
with social utility, 197, 198. 

Cost of production, 243; as influenced 
by rate of wages, 287, [288 ; relation 
to normal price, 253, 254; relation to 
value, 198, 199, 263, 264. 

Cost of reproduction, 244. 

Costs, law of comparative, 225, 226. 

Cournot, A. A., 29. 

Credit and Banking, ch. xxx, 518- 
553- 



Index. 



703 



Credit and Currency, ch. xxxi, 554- 
586. 

Credit, development of, 524-530; in- 
struments of, 521-524 ; nature of, 
51S-521; operations, 530-536; rela- 
tion to crises, 583-5S6 ; relation to 
prices, 550-553. 

Crises, 5S3, 5S4 ; relation to credit, 
5S3-5S6. 

Cropping system, 3S5, 3S6. 

Currency, paper, 509-516; principle, 
561 ; reform of, 5S0-5S3. 

Currency principle, 561. 

Custom, 150, 151. 

Customs duties, 598. 

£)EATH rate, 57-59. 

Demand, 222, 223 ; elasticity of, 
240-242; joint, 241, 242; normal, 
239-242. 

Demand and supply, 237; as an ex- 
planation of wages, 414, 415. 

Democracy, significance of, 696, 697. 

Demolins, E., 41. 

Deposit and check system, 539-543. 

Deposits, cash, 525-527 ; credit, 52S, 
529, 531-533 ; special, 527. 

Depreciation, law of, 206-209. 

Determination of Market Value, ch. xv, 
222-23S. 

Determination of Normal Value, The 
ch. xvi, 239-259 

Development of Economic Thought, 
ch. viii, 109-124. 

De Witt, Jean, 648. 

Diminishing returns, 250, 251 ; as af- 
fecting productivity of capital, 400, 
401 ; as affecting wages, 417, 418 ; as 
related to the law of rent, 373 ; in 
agriculture, 302-304; in mining, 305, 
306 ; law of, 211-214. 

Diminishing utility, 212. 

Discount, 529-531 ; rate of, 549, 550. 

Discount of future, relation to interest, 
396- 

Discrimination, railway, 628 ; as result- 
ing from competition, 623, 624; local, 
632-636 ; personal, 63 r, 632, 639, 
640 ; relation to classification, 628- 
631. 

Distribution, 118, 120, 122, 123; rela- 



tion to production, 352; shares in 

351-353- 
Disutility, 190-192; marginal, 192. 
Divorce, 165, 166. 
Domestic system, 92, 93. 
Double standard, see Bimetallism. 
Dynamics, 224. 

PCONOMIC Development of the 

United States, ch. vii, 99-108. 
Economic Law and Method, ch. ii, 23- 

35- 

Economic man, 5. 

Economic motive, 4, 5. 

Economic society, future of. 

Economic Stages, The, ch. v. 66-83. 

Economics, art of, 35 ; as a social sci- 
ence, 6; Austrian school of, 122; 
definition of, 4, 7, 8, 13; in antiquity, 
109-112; in the middle ages, 112- 
115; methods of, 27-30; pure and 
applied, 34, 35 ; relation to biology, 
29, to ethics, 32-34, to jurisprudence, 
31, 32, to politics, 31, to psychology, 
29; role of, 697, 69S; scope of, 22. 

Economy, capitalist or industrial, So- 
S;^ ; international, Si ; national, 81 ; 
self-sufficing, 74-76 ; village, 76-79. 

Edgeworth, F.Y., 4S0. 

Eight hour day, 431. 

Elkins Law, 639. 

Emigration, effect on distribution of 
population, 55; restrictions upon, 
166. 

Employer's liability, 433. 

Enclosures, 311. 

Engel, E., 6S0, 681. 

Enterprise, 281, 329; freedom of, 169; 
modern regulation of, i6g. 

Enterprise — The Concentration of 
Production, ch. xxii, 329-350. 

Entrepreneur, 84 ; characteristics of, 
297. 

Equality, 163, 164. 

Essartage, 309. 

Ethics, 6, 32-34. 

Exchange, par of, 594, 595; rate of, 

593. 594, 596. 
Exchanges, dislocation of, 502, 503 ; 

fixity of, 507, 50S. 
Exogamy, 66. 



704 



Index. 



Exports, from the United States, ic;,, 
105 ; relation to imports, 5S8-592, 
601, 606. 

pACTORY liws, 430-432, 574, 575- 
Factory system, 93-95, 322, 323; 

in America, 101, 102. 
Family, 86-S9 ; matriarchal, 85 ; patii- 

archal, 86, S7. 
Family budgets, 680-682; in America, 

681, 682. 
Fellow servant rule, 433. 
Feudalism, 130. 
Flying shuttle, 93. 
Forbearance, marginal, as determining 

the rate of interest, 396-399 ; as lim- 
iting accumulation of capital, 407, 

408. 
Free competition, 122. 
Freedom, ch. xi, 154-172. 
Freedom, 155 ; as a social concept, 170- 

172; economic, 119,155, 163-170; 

of association, 167, 168 ;of enterprise, 

169 ; of occupation, 167-169 ; of 

trade, 170. 
Free silver movement, 498-502. 
Free trade, 123, 170, 294; argument 

for, 604-606 ; criticism of, 608-612; 

growth of, 597-601 ; in continental 

countries, 600 ; in Great Britain, 599 ; 

in the United States, 600; original 

meaning of term, 597, 598. 
Fundamental Concepts, ch. i, 3-22. 
Future, discounting of, 209 211. 
Futures, in commodity market, 364- 

366; in foreign exchange, 695-696. 

/GENERAL Law of Value, The, 

ch. xvii, 260-274. 
Gens, 85. 

George, Henry, 133. 
Gilbert's act, 689. 
Gold certificates, 510. 
Gold point, 694, 695. 
Gold, production of, 491; in 1901, 

493- 

Gold standard, adoption of, 496, 507, 
50S; evolution of, 509; gold ex- 
change, 50S. 

Goods, 8; complementary, 241 ; eco- 



nomic, 1 1 ; free, 1 1 ; producers', 

212. 
Gossen, H. H., 29. 
Government and Business, ch. xxxv, 

655, 674- 
Government ownership, 637, 658-669; 

conditions of, 658, 659, 662, 663; 

development of, 658, 662. 
Government regulation, 669-671 ; in 

middle ages, 670, 671 ; in modern 

times, 570, 671. 
Graham's law, 486, 487. 
Green, T. H., 163. 
Gresham's law, 486, 4S7. 
Guilds, 91 ; decay of, 116. 

TTALES, 116. 
^ ^ Halley, E., 648. 
Hamilton, Alexander, 604, 605. 
Handicraft system, 90, 91. 
Help system, 89, 90. 
Historical Forms of Business Enter- 
prise, The, ch. vi, 84-98. 

IMMIGRATION, 59, 60; effect on 
distribution of population, 55; re- 
strictions upon, 166, 167. 

Immigration, Chfnese, 166, 298. 

Imports, relation to exports, 588-592, 
601, 606. 

Income, benefit and money, 16 ; rela- 
tion to capital, 15-19. 

Incomes as differentials, 218, 219. 

Increasing returns, 251. 

Independent treasury, 578, 580. 

Index numbers, 470, 474. 

Individualism, 38, 39. 

Industrial Revolution, 94 ; effect on 
economic science, 121. 

Industry, localization of, 294. 

Inheritance, 136, 137; taxation of, 

137- 

Insurance, ch. xxxiv, 641-654. 

Insurance, as diminishing uncertainty, 
649-652; forms of, 648, 649; gov- 
ernment management of, 653, 654; 
growth of, 644-649 ; in an,tiquity, 
645 ; methods of, 652, 653 ; nature 
of, 641-645; of the laborer, 434; 
origin of, 644, 647; productivity oi. 



Index. 



705 



650; regulation of, 653, 654; theory 
of, 649-652. 

Insurance companies, as media of in- 
vestment, 652, 653. 

Insurance, life, in the United States, 
648; origin of, 646-648. 

Insurance, marine, origin of, 645, 646. 

Insurance policies, forms of, 652, 653. 

Insurance premium, composition of, 
647, 648. 

Intelligence, transmission of, 47, 613- 
615. 

Interchangeable parts, 324. 

Interest, ch. xxv, 392-410. 

Interest, 264, 352; as affected by 
changes in cost of labor, 404, 405 ; 
as affi^cted by risk; 394; as a dis- 
count of the future, 219, 396; as 
measured by marginal forbearance, 
398, 399 ; as product of marginal 
capital, 402 ; as a reward for forbear- 
ance, 396-399 ; contract and econo- 
mic, 393 ; contrasted with profits, 
356; equivalence to rent, 393; in 
Greece and Rome, iii, 112; in the 
middle ages, 1 14 ; nature of, 392-395 ; 
on call loans, 395 ; regulation of, 408- 
410; relation to cost of production of 
capital, 265, 266 ; relation to produc- 
tivity, 399-402; relation to rent, 
216; tendency to a minimum, 405- 
408. 

Interest, rate of, 220, 221 ; in antiquity, 
404; in middle ages, 404; variations 
in, 403-405. 

Interest and prices, 477, 478; 572-576; 
as influenced by changes in money, 
574) 575; °^ <^^^1 loans, 576-580. 

International Trade, ch. xxxii, 5S7- 
612. 

International trade, basis of, 587-588. 

Interstate Commerce Commission, 638, 

639- 
Interstate Commerce Law, 349, 632, 

635,.638. 
Inventions as creating profits, 355. 
Irrigation, 43. 

TEVONS, W. S., 29, 122, 191, 198, 
J 470. 
Joint cost, as basis of postal charges, 



615 ; as basis of railway charges, 
625, 626. 
Jurisprudence, 6, 31, 32. 



TT ING, Gregory, 465. 
Kinley, D., 480. 



T ABOR, ch. xix, 2S5-299. 

Labor, American Federation of, 

434- 

Labor, combination of, 296, 297 ; dis- 
tinguished from other commodities, 
41-^, 414 ; division of, 290-296; legis- 
lation in behalf of, 430-434; pro- 
ductive and unproductive, 277-279; 
regulation of houft, 431 ; standardi- 
zation of, 435-438. 

Labor legislation, 430-434. 

Labor organizations, 434, 442 ; methods 
of, 439-442- 

Labor Problem, The, ch. xxvii, 429- 

447- 

Labor theory of property, 132, 133. 

Laisscz fairc, 123, 169. 

Land, ch. xx, 300-312. 

Land, 280 ; as capable of increase in 
quantity, 302, 303; as a factor in 
production, 300-303 ; as a separate 
economic category, 314; diminishing 
returns from, 302-304 ; distinguished 
from monopoly, 389 ; mobility of, 
308; private property in, 128-131, 
305 ; taxation of, 303 ; value of, 
260. 

Land tenure, 383-3S8. 

Lands, forest, 305; mineral, 305, 306. 

Lassalle, 659. 

Latin Union, 497-499. 

Law, economic, 23-27; historical, 26; 
natural, 25, 26. 

Legal tender, 453 ; notes, 511-516. 

Limited liability, 96. 

List, Friedrich, 604, 605. 

Loans, call, 531, 576-586; time, 531. 

Lombard business, 528. 

Longfield, 419. 

Lotteries, 660. 

Luxury, 676-680 ; as affording employ- 
ment, 676, 677 ; justification of, 677- 
679 ; socialization of, 679. 



706 



Index. 



]V/rACHINERY, effect on labor, 299. 

Maine, Sir Henry, 67. 
Maltlius, 60-65. 
Margin, economic, 177, 178. 
Market, 223. 

Marriage, freedom of, 165. 
Marshall, A., 29, 124, 194. 
Marx, Karl, 123, 369, 658. 
Matriarch ate. 85. 
Meaning of Value, The, ch. xii, 173- 

188. 
Measure of Value, The, ch. xiii, 189- 

203. 
Mercantile system, 115-11S, 598, 599. 
Metayer system, 385, 442. 
Migration, 166. 
Mill, J. S., 26, 550, 588, 604. 
Minor coins, 455, 456. 
Mint, accidents, 483 ; charge, 482. 
Mir, 74-76. 
Monchretien, 117. 
Monetary conferences, international, 

499, 500- 

Monetary demand, changes in, 461, 
462 ; nature of, 456-460. 

Monetary supply, 463-466. 

Money, abrasion, 483 ; contrasted with 
wealth, 19; convertible, 507, 561 ; cost 
theory of, 467,468; credit, 510, 554- 
582; debasement of, 484, 485; "de- 
mand for," 418-462, 573-5S0; dis- 
tribution of, 473-475 ; fiat, 511-516; 
fiduciary, 452, 509, 554-582; free 
coinage of, 481, 493-501 ; functions, 
19, 449-451; ideal, 452; in an- 
tiquity, 112; in middle ages, 115; 
irredeemable, 51 1-5 16; kinds of, 
452-456 ; metallic, 4S1-485 ; mint 
charge, 482,483; origin, 450, 451; 
quantity theory of, 466-468 ; paper, 
509-517; remedy, 483; representa- 
tive, 452, 510-511; seigniorage on, 
482, 483; stability of, 476-479; 
standard, 453, 456; stock of, iS, 451; 
subsidiary, 453-456 ; theory of, in 
antiquity, 112; token, 453, 456. 

Money market, 576, 5 So. 

Money, Nature and Value, ch. xxviii, 
481-517. 

Money, Practical Problems, ch. xxix, 
481-517. 

Money rate, 549, 550, 572-576. 



Money standard, choice of, 493-507; 
alternating, 494-496; double, 493- 
502; gold, 507-509; gold exchange, 
508; silver, 502-507. 

Money, value of, 456-466; appreciation 
of, 476-480; as affected by rapidity 
of circulation, 463-465 ; as dependent 
on cost of production, 467, 468 ; de- 
preciation of, 476-480 ; effect of vari- 
ations on wages and prices, 476- 
480. 

Monopolies, fiscal and social, 659, 660; 
kinds of, 152, 153: municipal, 225; 
social, classes of, 660. 

Monopoly, 152, 153, 229, 238; distin- 
guished from concentration, 330 ; 
effect on wages, 426 ; need of regula- 
tion, 350; regulation of, 670. 

Monopoly price, 235, 236, 255-259, 
368, 531 ; as limited by potential com- 
petition, 36S ; as limited by substitu- 
tion, 368- 

Monopoly profits, 366-368 ; capitaliza- 
tion of, 367 ; regulation of 368, 369. 

Monopoly rent, 367. 

Monopoly wages, 367, 425, 426. 

Morgan, L. H., 72. 

Mortality tables, 647. 

Multiple standard, 479, 480. 

Mun, Thomas, 117. 

Municipalization, 666-669; of bridges, 
663; of canals, 663; of markets and 
docks, 662, 663; of roads, 663. 

Municipal ownership, 666-669 ; of elec- 
tric lighting, 666, 667 ; of gas wrorks, 
666-668; of street railways, 666-668; 
of water works, 666, 667. 



■VTATIONALISM, 609, 610, 

Natural Environment, The, ch. 

iii, 36-47. 
Natural law, 119, 132. 
Natural rights, as a defence of private 

property, 132. 
Non-competing industrial groups, 425, 

587. 
Northern Securities Company, 149. 



/^PEN field system, 129, 
Open shop, 440-442. 
Outdoor relief, 68g, 690. 



Index. 



707 



Overcapitalization, 273, 274; relation to 

crises, 5S5, 586. 
Overproduction, as an explanation of 

crises, 584. 



pAPER currency, 509-517; in the 
United States, 574-577. 

Parcels post, 614, 615, 663, 664. 

Partnership, 95, 96. 

Patents, 152, 153. 

Pauperism, 689, 690; in the United 
States, 690. 

Payne, E. j., 309. 

Physiocrats, 26, 118-121, 277,606. 

Picketing, 439. 

Pohtical economy, definition of, 4; 
origin of term, 7. 

Politics, 6, 30, 31. 

Pools, 97, 338, 339. 

Poor laws, 689, 6go. 

Population, The, ch. iv, 48-65. 

Population, concentration of, 51, 52; 
density of, 48-51 ; distribution of, 
53-57; law of, 60-65; migration of, 
59, 60. 

Postal charges, principle of, 615. 

Post-office, 613, 615; as a government 
monopoly, 663, 664. 

Poverty, 680-697; causes of, 684-687; 
modern, as compared with that of 
earlier times, 687 ; prevention of, 690- 
693 ; relief of, 688-691 ; remedies for, 
688-693. 

Poverty and Progress, ch. xxxvi, 675- 
69S. 

Power, transmission of, 46. 

Precious metals, changes in value of, 
490-493 ; industrial consumption of, 
487, 488 ; production of, 488-492 ; 
supply of, 463, 466; in 1905, 493. 

Price, 184, 185 ; as affected by com- 
bination, 347; customary, 113; de- 
mand and supply, 237; just, 113, 
114, 150; market, 223, 224; monop- 
oly, 235, 236, 253-259, 368, 531; 
natural, 224; regulation of, 271 ; re- 
lation to cost of production, 243, 244; 
relation to marginal cost, 378 ; rela- 
tion to rent, 376-379. 

Price level, changes in, 46S-470 ; de- 



termination of, 470-473; equilibrium 
of, 473-476; fluctuations of, 476- 
480 ; transmission of changes in, 473- 

475- 

Price, normal, 223, 224 ; relation to 
cost of production, 253, 254; relation 
to joint cost, 251-253; relation to 
marginal cost, 246, 247. 

Prices, movement of, 473-456 ; revolu- 
tion of, 495; wholesale and retail, 
471. 

Private Property, ch. ix, 125-138. 

Private property, historical origin, 25, 
125-128; limits, 134-136; theories 
of, 131-134. 

Private property in land, 128-131 ; 
justification of, 305. 

Production, factors of, 280-282 ; large 
scale, 331-337; meaning of, 275, 276; 
relation to consumption, 276, 277, 
283, 2S7 ; relation to distribution, 

352- 

Productions of the United States, 103- 
105. 

Profits, ch. xxiii, 351, 370. 

Profits, 237, 23S, 352 ; agricultural, 
3^3' 3S4 ; aleatory, 357-359 ; as anni- 
hilated by competition, 356, 357 ; as 
a differential, 335, 354 ; as a result of 
price, 357; contrasted with interest, 
356; contrasted with wages, 357; 
industrial and pecuniary, 358, 359; 
instability of, 355, 356; justification 
of, 368-370; monopoly, 356-35S; 
normal, 353; ordinary, 353-357; re- 
lation to rent, 374-376 ; relation to 
wages, 347 ; speculative, 359-366. 

Profit-sharing, 442-445. 

Property, 19. 

Property rights, 136-138. 

Protection, 59S-599; arguments against, 
606-608; arguments for, 601-606; 
criticism of, 608-912; influence on 
wages, 602-604; in the United 
States, 600, 601, 611, 612; recru- 
descence of, 600, 601. 

Protective tariff, loi. 

Public ownership, conditions of, 658, 
659, 662, 663 ; development of, 658- 
662. 

Pyx, trial of the, 483. 



7o8 



Index. 



QUA-NTITY, theory of, 466-468. 
^"^ Quesnay, 120. 

"p AILWAY charges, analogy with 
taxation, 627 ; influence on com- 
bination, 341, 342; in the United 
States, 620; principle of, 252, 624- 
629. 

Railway discrimination, 631-636, 639, 
640. 

Railway rebates, 632, 639 ; effect on 
combination, 346. 

Railways, 102; as quasi-public enter- 
prises, 149, 150, 524-528; basis of 
valuation, 272, 273; competition 
among, 149, 622-624 ; consolidation, 
617-621; cost of, 616, 617; develop- 
ment of, 616; government owner- 
ship, 637, 660, 665, 666 ; in the 
United States, 616-621 ; regulation 
of, 349, 638-640 ; tendency toward 
monopoly, 617, 620-624 

Raymond, D., 604, 605. 

Relief, outdoor, 690. 

Remittances, 534-536. 

Rent, ch. xxiv, 371-391. 

Rent, 352 ; as affected by agricultural 
Improvements, 382, 383 ; as depend- 
ent on the law of diminishing returns, 
373; as a differential income, 217, 
218, 373, 374; consumers', 194; con- 
tract and economic, 384-387 ; land 
and ground, 379, 3S0 ; monopoly, 367; 
nature of, 371, 373; relation to in- 
terest, 216, 393 ; relation to price, 
376-379 ; relation to profit, 374-376 ; 
traditional use of term, 205. 

Rent of land, 372, 373; growth of, 
380-383 ; justification, 388-391 ; tra- 
ditional law of, 373. 

Reserves, see bank reserves. 

Ricardo, 121-123, 198, 588. 

Risk, 642-644; cost of, 649, 650; effect 
upon interest rates, 394 ; increase of, 
in modern times, 644 ; methods of 
avoiding, 653-644. 

Rowntree, R. S., 683. 

C AFETY fund, 567, 568. 

Science, effect on economic life, 
697. 



Seigniorage, 482, 487. 

Serfdom, 159, 160. 

Serra, 117. 

Services, 9, 10. 

Share system, 385. 

Sherman act, 500. 

Shipping subsidies, 673-674. 

Short haul principle, 635, 636. 

Silver, certificates, 510, 511; coins in 
United States, 454, 455 ; fall in value 
of, 492, 499-502; production of, 491, 
in 1905, 493 ; struggle for, 498-502. 

Silver standard, abandonment of, 502- 
507; in India, 503, 504; in Mexico, 
506; in the Phillippines, 505; in 
other countries, 507. 

Single tax, 390. 

Single taxers, 388. 

Sinking fund, 208. 

Slavery, 298; decay of, 158-162; de- 
pendence on free land, 157, 158; in 
America, 157, 158, 160, 161 ; in 
Rome, 157, 158; origin, 154-158; 
traditional defence of, 162. 

Smith, Adam, 116, 118-121, 294, 314, 
424. 

Social economics, 7. 

Social science, 6. 

Social solidarity, 164. 

Socialism, 64, 136, 655-658 ; as a rem- 
edy for poverty, 692 ; attitude toward 
labor, ^86 ; attitude toward profits, 
369, 370 ; attitude toward rent, 388. 

Sociology, 6. 

Specialization, 292, 295. 

Speculation, 359-366; regulation of, 

369- 

Spencer, Herbert, 67, 163, 290. 

Spinning frame, 93. 

Spinning jenny, 93. 

Spinning mule, 93. 

Standard, alternating, 493-496; double, 
493-498; gold, 507-509; gold-ex- 
change, 508 ; limping, 498, 508 ; 
multiple, 479, 480; silver, 502-506; 
tabular, 479-480. 

Standard of life, as determining wages, 
419-421. 

Standardization of industry, 323. 

Staple, 598. 

Statics^ 224. 



Index. 



709 



Statistics, 30. 

Steam engine, 93. 

Stocks, kinds of, 326, 327. 

Stock-watering, 273, 274. 

Strikes, 439, 440. 

Subsidies, 673, 674. 

Substitution, principle of, 142 ; as limit- 
ing monopoly price. 368. 

Suffolk bank system, 566, 567. 

Sumptuary laws, 16S. 

Supply, elasticity of, 249-251; forces 
regulating, 190: joint, 251-253; nor- 
mal, 242-244. 

Surplus, 194-1 98, 201-203 ; consumers', 
194, 195. ^2,1^ 23S ; producers', 194. 

TP ABULAR standard, 479, 4S0. 

Tariff, in continental countries, 
600; in Great Britain, 600, 601 ; in 
the United States, 5oo, 601 ; influence 
on combinations, 341, 342; origin of 
term, 598 ; relation to trusts, 349, 

3S0- 

Taxation, absorption of, 2 70 ; capitaliza- 
tion, 269, 270 ; diffusion, 26S, 269 ; 
of corporations, 267, 268 ; of general 
property, 268; of inheritance, 137; 
of land, 303 ; shifting of, 269. 

Telegraph, basis of charges, 615 ; gov- 
ernment ownership of, 660, 664, 665. 

Telephone, basis of charges, 615 ; gov- 
ernment ownership of, 660, 664, 665. 

Tenancy, systems of, 385, 3S6. 

Theory, alleged antithesis to practice, 
27. 

Three field system, 311. 

Tontine annuity, 647. 

Totem, 86. 

Trade dollar, 455. 

Trade routes, importance of, in anti- 
quity and middle ages, 694. 

Trade unions, 167, 168, 434-442; as 
restricting membership, 296 ; as re- 
stricting output, 43S ; functions of, 
435 ; jurisdictional disputes, 437 ; 
justification of, 434, 435. 

Transportation, ch. xxxiii, 6T3-640. 

Transportation, effect of improvements 
in, 45, 46 ; productivity of, 650. 

Treasury notes of 1890, 511. 

Truck system, 432. 



Trust, origin of term, 339. 

Trusts, 98, 153; effect of, on prices, 
347; on producer of rawmaterial, 346, 
347; on wages, 344, 345 ; relation to 
tariff, 349, 350. 

Turgot, 116, 120. 

Two field system, 310. 

"QNDERCONSUMPTION, as an 
explanation of crises, 584. 

Unearned increment, 390. 

Unfair list, 440. 

Union label, 440. 

United States Steel Corporation, 342- 
344, 348- 

Usury, 114, 408-410; prohibition of, 
671. 

Usury laws, evil consequences of, 578- 
581. 

Utilities, classification of, 27S, 279 ; 
law of comparative, 225, 226. 

Utility, 175, 176; as the cause of value, 
201 ; definition of, 8 ; effective, 176 ; 
final, 176; indirect, 193; law of di- 
minishing, 175, 176; marginal, 175- 
177, 262, 263; social, equivalence 
with social cost, 197, 198; total, 176, 
177- 

Utilization, margin of, 213, 214. 

"yALUE, as a differential, 217, 218; 
as a social phenomenon, 389, 390 ; 
as dependent on limitation, 199; as 
dependent on marginal increments of 
utility, 186, 1S7 ; as dependent on 
social cost, 193 ; as dependent on 
social marginal utility, 18S; capital 
and rental, 206, 207 ; definition of, 
II ; individual and social, 179-1S2; 
labor theory of, in middle ages, 114 ; 
market, 230-238; normal, 247-249; 
objective, 1S2, 1S3 ; of land, 260 ; of 
non-reproducible goods, 260, 261 ; 
of privileges and franchises, 261, 162; 
of producers' goods, 212; original 
meaning of term, 173-175 ; relation 
to cost, 190, 19S, 199, 263, 264, 419; 
relation to marginal utility, 1 79, 262, 
263. 266 ; relation to rent, 204-206 ; 
social nature of, 193 ; subjective, 



JIO 



Index. 



182, 183 ; ultimate explanation of, 

266. 
Value in exchange, 182-1S4. 
Value in use, 1S2, 

^^AGES, ch. xxvi, 411-428. 

Wages, 264, 352 ; as affected by 
changes in supply of capital, 421, 422; 
as affected by changes in supply of 
land, 421, 422; as affected by com- 
bination, 344, 345; as affected by 
diminishing returns, 417, 418; as 
affected by monopoly, 426 ; as affected 
by protection, 602-604 ; as affected 
by variations in the value of money, 
478 ; as determined by demand and 
supply, 414, 415; as a rent, 377; 
compared with rent and interest, 411, 
412 ; contrasted with prices of com- 
modities, 413, 414; contrasted with 
profits, 357; dependence on effi- 
ciency of labor, 289, 290 ; dependence 
on marginal productivity, 416-418 , 
general rate of, 412, 413; iron law, 
411; ; minimum laws in Australasia, 



432, 670 ; minimum subsistance 
theory, 415 ; money and real, 413, 
423,424; monopoly, 367, 425, 426; 
nature of, 411 -414 ; rate of, and cost 
of production, 287, 288, 603; relation 
to cost of production of labor, 265, 
266, 414-416; relation to profits, 
427; Ricardian doctrine of, 122; 
rise of, in the United States, 422, 
423; standard rate, 435, 436; 
women's 420. 

W^ages fund, 64, 415, 416. 

Walker, F. A., 124. 

Walsh, C. M., 479. 

Wealth, as consisting of services, 10; 
characteristics of, 8, 9, 12 ; contrasted 
with money, 19; contrasted with 
property, 19, 20; intangible, 9; mar- 
ginal increments of, 185-188; meas- 
ured by income,, 19; public and 
private, 20-22. 

Women's wages, 420. 

Working day, normal, as an object of 
trade union activity, 436, 437. 

Workmen's Compensation Act, 433, 



THE LNlVKUSll'V I'UESS, CAJlliUlDGE, IT. S. A. 



rR-1l-:b 






